Weekly Earnings Commentary
I expect to see a busy week this week with several key positions on our watch list due to announce earnings.
I expect to start the week with a trade in Home Depot (HD) which is due to announce prior to the opening bell tomorrow. The other announcement I’ll be focusing on is Walmart (WMT) which is due to announce prior to the opening bell on Thursday. I fully anticipate making trades around both announcements, as long as Mr. Market cooperates, so stay tuned for several trade alerts this week.
And if you were not able to listen to our last subscriber-only webinar, please click here to take the time to give it a quick listen as I’m positive it will be helpful in all your trading endeavors going forward.
As I’ve said over and over in our weekly conversations, risk management is key. If one trade stresses you out your position size is way too large. Pare it back. Position size is the only true way to manage risk using this approach. Yes, in almost every case, we will be able to get out for far less than a max loss, but stop-losses are only secondary to position size when managing risk. So please don’t overlook the importance of choosing an appropriate level of position size. Every investor will have a different level of risk tolerance, but without understanding your own risk-reward per trade, you are surely destined to create unnecessary challenges. Make it easy on yourself.
We’ve made 38 trades in total with a win ratio of 79.0% (30 out of 38 winning trades).
If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
Weekly Watchlist
Home Depot (HD)
Expected Move or Range: (278 - 304)
Target (TGT)
Expected Move or Range (99 - 118)
Walmart (WMT)
Expected Move or Range (161 - 171)
Top Earnings Options Plays
Here are a few top earnings options plays for this week (11/13 to 11/17) if you are so inclined:
Images Courtesy of Slope of Hope
Trade Ideas for This 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 (Not Official Trade Alerts)
Home Depot (HD)
Home Depot (HD) is due to announce earnings Tuesday before the opening bell.
The stock is currently trading for 291.51.
- IV Rank: 39.8
Expected Move for the November 17, 2023, Expiration Cycle: 278 to 304
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 278 to 304.
If we look at the call side of HD for the November 17, 2023, expiration, we can see that selling the 310 call strike offers an 89.28% probability of success. The call strike sits just above the expected move, or at 304.
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, 278. The 270 put, with a 90.49% probability of success, works.
We can create a trade with a nice probability of success if HD stays within the 40-point range, or between the 310 call strike and the 270 put strike. Our probability of success on the trade is 89.28% on the upside and 90.49% on the downside.
Moreover, we have a 6.3% cushion to the upside and a 7.4% margin of error to the downside.
If we look at the earnings reactions since 11/13/2006, we can see that there have only been a few large moves of roughly 5% to the upside and 4% to the downside after an earnings announcement, so the wide margins of error of 6.3% to the upside and 7.4% to the downside of the trade seem appealing … and more importantly, opportunistic.
Quick Stats
Net Change – At the Opening Bell
Full Bar – Closing Bell
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 the potential trade (as always, if I decide to place a trade in HD, I will send a trade alert with updated data):
Simultaneously:
Sell to open HD November 17, 2023, 310 calls
Buy to open HD November 17, 2023, 315 calls
Sell to open HD November 17, 2023, 270 puts
Buy to open HD November 17, 2023, 265 puts for roughly $0.68 or $68 per iron condor.
Our margin requirement would be roughly $432 per iron condor. Again, the goal of selling the HD iron condor is to have the underlying stock stay below the 310 call strike and above the 270 put strike immediately after HD earnings are announced.
Here are the parameters for this trade:
- The probability of success – 89.28% (call side) and 90.49% (put side)
- The maximum return on the trade is the credit of $0.68, or $68 per iron condor
- Max return: 15.7% (based on $432 margin per iron condor)
- Break-even level: 310.68 – 269.32
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 November 20, 2023.