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Earnings Trader
Collect the Biggest Option Payouts Every Quarter

COI Earnings Trader Issue: May 15, 2023

Weekly Earnings Commentary

Our next webinar is this Friday, May 19. If you wish to attend the event or simply wish to receive a notification of the recording’s availability, please click here.

Our focus this week will be on Home Depot (HD), Target (TGT) and Walmart (WMT).

We’ve gotten back on track the past few weeks with another small winning trade, a one-day, 4.2% gain in Disney (DIS). In total we’ve placed six trades this earnings season, with a cumulative loss of -11.9%. With a few more weeks left on the earnings calendar, we have three to four more opportunities to bring our returns back to breakeven for this cycle or possibly into positive territory.

Our overall return is 33.1% - certainly nothing to write home about, but also no complaints as we thankfully sit in positive territory during what has been an incredibly challenging market for all participants over the past year.

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

Weekly Watchlist

  • Home Depot (HD)
  • Target (TGT)
  • Walmart (WMT)

Top Earnings Options Plays

Here are a few top earnings options plays for this week (5/15-5/19) if you are so inclined:

COI_ET_051523_earnreaction.png

Images 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

Walmart (WMT)

Walmart (WMT) is due to announce earnings Thursday before the opening bell.

The stock is currently trading for 153.07.

  • IV Rank: 29.7
  • IV: 33.0%

Expected Move for the May 26, 2023, Expiration Cycle: 147 to 160

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 147 to 160.

  • If we look at the call side of WMT for the May 26, 2023, expiration, we can see that selling the 162.5 call strike offers an 88.34% probability of success. The 162.5 call strike sits just above the expected move, or 160.
COI_ET_051523_WMT_bearcall.png

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 147. The 142 put, with an 87.12% probability of success, works.

COI_ET_051523_WMT_bullput.png

We can create a trade with a nice probability of success if WMT stays within the 20.5-point range, or between the 162.5 call strike and the 142 put strike. Our probability of success on the trade is 88.34% on the upside and 87.12% on the downside.

Moreover, we have a 6.2% cushion to the upside and a 7.2% margin of error to the downside.

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. At the time of the trade, my hope is that I can increase my “cushion,” or probabilities of success on the trade, as I would be far more comfortable. However, the premium must still make sense.

Here is the potential trade (as always, if I decide to place a trade in WMT, I will send a trade alert with updated data):

Simultaneously:

Sell to open WMT May 26, 2023, 162.5 calls

Buy to open WMT May 26, 2023, 167.5 calls

Sell to open WMT May 26, 2023, 142 puts

Buy to open WMT May 26, 2023, 137 puts for roughly $0.62 or $62 per iron condor.

Our margin requirement would be roughly $438 per iron condor. Again, the goal of selling the WMT iron condor is to have the underlying stock stay below the 162.5 call strike and above the 142 put strike immediately after WM earnings are announced.

Here are the parameters for this trade:

  • The probability of success – 88.34% (call side) and 87.12% (put side)
  • The maximum return on the trade is the credit of $0.62, or $62 per iron condor
  • Max return: 14.2% (based on $438 margin per iron condor)
  • Break-even level: 163.12 – 141.38.

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 May 22, 2023.

Andy Crowder is a professional options trader, researcher and Senior Analyst at Cabot. 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.