COI Earnings Trader Issue: June 26, 2023

Weekly Earnings Commentary

*Note: With next Tuesday being the Fourth of July holiday, Cabot has graciously given us next Monday, July 3, off as well as sort of a midyear mini-break on the heels of a chaotic – but quite profitable – first half of 2023. So, your next issue of Cabot Options Institute Earnings Trader will arrive in your inbox next Wednesday, July 5.

As we get closer and closer to the unofficial launch date of earnings season (July 14), a few decent opportunities still remain on the calendar. That being said, per the usual during earnings offseason, I’m going to keep it short today.

This week Walgreens Boots Alliance (WBA), Micron (MU), and Nike (NKE) are due to announce. And then we hit a dry spell until July 14 when many of the big banks are due to announce, the same day I’ll be hosting my first webinar of the earnings season.

There is a good chance I will place a trade in MU this week. Both the IV rank and premium are decent and the margin of error is roughly 10% on both the call and put side of the trade (details below). I would be happy to take 5% to 10% out of what would most likely be a one-day trade.

If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.

Weekly Watchlist

Paychex (PAYX)
Micron (MU)
Nike (NKE)

Top Earnings Options Plays

Here are a few top earnings options plays for this week (6/26 to 6/30) if you are so inclined:

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

Micron (MU)

Micron (MU) is due to announce earnings Wednesday after the closing bell.

The stock is currently trading for 65.28.

IV Rank: 26.0
IV: 49.8%

Expected Move for the July 7, 2023, Expiration Cycle: 60.5 to 70

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 70 to 60.5.

If we look at the call side of MU for the July 7, 2023, expiration, we can see that selling the 72 call strike offers an 85.42% probability of success. The 72 call strike sits above the expected move, or 70.

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 60.5. The 59 put, with an 85.11% probability of success, works.

We can create a trade with a nice probability of success if MU stays within the 9.5-point range, or between the 70 call strike and the 60.5 put strike. Our probability of success on the trade is 85.42% on the upside and 85.11% on the downside.

Moreover, we have a 10.3% cushion to the upside and a 9.6% margin of error to the downside.

If we look at the earnings reactions since 4/4/2007 we can see that there have been only a few breaches of 10% to the upside or downside after an earnings announcement and in MU’s case they all occurred between 2014 and 2016.

Earnings Reaction at Open Bell

Earnings Reaction at Closing Bell

An iron condor looks interesting and, well, a bit tempting in MU 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. As always, if I decide to place a trade in MU this week, I will send a trade alert.

Here is a potential trade:

Simultaneously:

Sell to open MU July 7, 2023, 72 calls

Buy to open MU July 7, 2023, 77 calls

Sell to open MU July 7, 2023, 59 puts

Buy to open MU July 7, 2023, 54 puts for roughly $0.65 or $65 per iron condor.

Our margin requirement would be roughly $435 per iron condor. Again, the goal of selling the MU iron condor is to have the underlying stock stay below the 72 call strike and above the 59 put strike immediately after MU earnings are announced.

Here are the parameters for this trade:

The probability of success – 85.42% (call side) and 85.11% (put side)
The maximum return on the trade is the credit of $0.65, or $65 per iron condor
Max return: 14.9% (based on $435 margin per iron condor)
Break-even level: 72.65 – 58.35.

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 July 5, 2023.

Andy Crowder

Andy Crowder is a professional options trader, researcher and Chief Analyst of Cabot Options Institute. Formerly with Oppenheimer & Co. in New York, Andy has leveraged his investment experience to develop his statistically based options trading strategy which applies probability theory to option valuations in order to execute risk-controlled trades. This proprietary strategy has been refined through two decades of research and real-world experience and has been featured in the Wall Street Journal, Seeking Alpha, and numerous other financial publications. Andy has helped thousands of option traders learn and implement his meticulous rules-driven options trading strategies through highly attended conferences, one-on-one coaching, webinars, and his work as a financial columnist. He currently resides in Bolton Valley, Vermont and when he’s not trading, teaching and writing about options, he enjoys spending time with his wife and two daughters, backcountry skiing, biking, running and enjoying all things outdoors.