Weekly Earnings Commentary
We are one week closer to the kickoff of next earnings season.
On July 14, JPMorgan (JPM) and Wells Fargo (WFC) and several other notable big banks are due to report earnings. Until then, we will patiently wait, and of course peruse the sparse weekly announcements for a potential opportunity or two.
This week, in fact, today after the closing bell, FedEx (FDX) is due to report earnings. The liquidity of the options in FDX are good and the probabilities and premium line up as well. While I typically shy away from earnings trades outside of earnings season, this is one I am seriously considering. Of course, if I decide to place a trade, as always, I will send an email and text with all the details. If you wish to dig deeper into a potential FDX trade take a look at my potential trade idea in FDX below.
If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
Weekly Watchlist
- FedEx (FDX)
- Manchester United (MANU)
Top Earnings Options Plays
Here are a few top earnings options plays for this week (6/20-6/23) if you are so inclined:
Image Courtesy of Slope of Hope
Trade Ideas for Next Week
As a reminder, you will quickly begin to notice I tend to stick with stocks that have high liquidity as it’s far easier to get in and out of a trade. Medium liquidity offers tradable options, but sometimes the bid-ask spread is wider, which means a greater potential for more price adjustments, making entering and exiting a trade difficult from time to time. Remember, there are roughly 3,200 tradable stocks with options and 11% have medium liquidity while only 3% have what’s considered high liquidity.
Potential Trade Ideas for This Week
FedEx (FDX)
FedEx (FDX) is due to announce earnings Tuesday after the closing bell.
The stock is currently trading for 233.46.
- IV Rank: 39.9
- IV: 60.7%
Expected Move for the June 23, 2023, Expiration Cycle: 220 to 247.5
Knowing the expected range, I want to place the short call strike and short put strike of my iron condor outside of the expected range, in this case outside of 220 to 247.5.
If we look at the call side of FDX for the June 23, 2023, expiration, we can see that selling the 257.5 call strike offers an 88.07% probability of success. The 257.5 call strike sits above the expected move, or 247.5.
Now let us move to the put side. Same process as the call side. But now we want to find a suitable strike below the low side of our expected move, or 220. The 210 put, with an 89.10% probability of success, works.
We can create a trade with a nice probability of success if FDX stays within the 47.5-point range, or between the 257.5 call strike and the 210 put strike. Our probability of success on the trade is 88.07% on the upside and 89.10% on the downside.
Moreover, we have a 10.3% cushion to the upside and a 10.0% margin of error to the downside.
If we look at the earnings reactions since 3/21/2007 we can see that there have been only a few breaches of 10% to the upside or downside after an earnings announcement.
Earnings Reaction at Open Bell
Earnings Reaction at Closing Bell
An iron condor looks interesting and, well, a bit tempting in FDX this week. If one wanted to make a trade, below are the potential strikes that make the most sense or are at least a starting point for a trade.
Here is a potential trade:
Simultaneously:
Sell to open FDX June 23, 2023, 257.5 calls
Buy to open FDX June 23, 2023, 262.5 calls
Sell to open FDX June 23, 2023, 210 puts
Buy to open FDX June 23, 2023, 205 puts for roughly $0.80 or $80 per iron condor.
Our margin requirement would be roughly $420 per iron condor. Again, the goal of selling the FDX iron condor is to have the underlying stock stay below the 257.5 call strike and above the 210 put strike immediately after FDX earnings are announced.
Here are the parameters for this trade:
- The probability of success – 88.07% (call side) and 89.10% (put side)
- The maximum return on the trade is the credit of $0.80, or $80 per iron condor
- Max return: 19.0% (based on $420 margin per iron condor)
- Break-even level: 258.30 – 209.20.
As always, if you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
The next Cabot Options Institute – Earnings Trader issue will be published on June 26, 2023.