Weekly Earnings Commentary
Earnings season is mostly behind us as we enter the week of Thanksgiving and a holiday-shortened week of trading. There are still a few opportunities lingering ahead, but the potential trades are few and far between until another round of fresh earnings announcements starts anew around the middle of January.
I’ll be keeping an eye on Lowe’s (LOW) and Nvidia (NVDA) this week, but the chances of making an official trade are fairly low as both stocks have a few concerning issues for our screens. While both companies offer decent options liquidity, they are just too volatile for my liking, at least at the moment. Again, even though it has been a slow earnings cycle for trading, it doesn’t mean we should force a trade. Remember, trading is always about quality over quantity.
As I stated last week, after a win rate of just 60% (9/15 winning trades) in 2022 and total returns reaching a paltry 8.1%, our win rate in 2023 stands at 87.5% (21/24 winning trades) with total returns now reaching 80%. What a difference a year makes! And even though our last earnings cycle finished slightly lower on the whole, hopefully, our good fortune continues, and it should if we stick with the mechanics and, more importantly, a disciplined set of risk management guidelines, starting with appropriate and consistent position size.
I’ll be introducing several new items starting in 2024, which should give those of you who yearn for more earnings trades the opportunity to take on more trades, regardless of if I decide to pull the trigger on a potential trade or not.
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 39 trades in total with a win ratio of 76.9% (30 out of 39 winning trades).
If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
Weekly Watchlist
Lowe’s (LOW)
Expected Move or Range: (192.5 – 215)
Nvidia (NVDA)
Expected Move or Range (455 – 530)
Top Earnings Options Plays
Here are a few top earnings options plays for this week (11/20 to 11/24) 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)
Lowe’s (LOW)
Lowe’s (LOW) is due to announce earnings Tuesday before the opening bell.
The stock is currently trading for 203.70.
- IV Rank: 53.1
Expected Move for the November 17, 2023, Expiration Cycle: 192.5 to 215
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 192.5 to 215.
If we look at the call side of LOW for the November 24, 2023, expiration, we can see that selling the 217.5 call strike offers an 88.10% probability of success. The call strike sits just above the expected move, or at 215.
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, 192.5. The 190 put, with an 87.63% probability of success, works.
We can create a trade with a nice probability of success if LOW stays within the 27.5-point range, or between the 217.5 call strike and the 190 put strike. Our probability of success on the trade is 88.10% on the upside and 87.63% on the downside.
Moreover, we have a 6.8% cushion to the upside and a 6.7% margin of error to the downside.
If we look at the earnings reactions since 11/20/2006, we can see that there have only been a few large moves of roughly 5% to the upside and 6% to the downside after an earnings announcement, so the wide margins of error of 6.8% 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 LOW, I will send a trade alert with updated data):
Simultaneously:
Sell to open LOW November 24, 2023, 217.5 calls
Buy to open LOW November 24, 2023, 222.5 calls
Sell to open LOW November 24, 2023, 190 puts
Buy to open LOW November 24, 2023, 185 puts for roughly $0.75 or $75 per iron condor.
Our margin requirement would be roughly $425 per iron condor. Again, the goal of selling the LOW iron condor is to have the underlying stock stay below the 217.5 call strike and above the 190 put strike immediately after LOW earnings are announced.
Here are the parameters for this trade:
- The probability of success – 88.10% (call side) and 87.63% (put side)
- The maximum return on the trade is the credit of $0.75, or $75 per iron condor
- Max return: 17.6% (based on $425 margin per iron condor)
- Break-even level: 218.25 – 189.25.
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 27, 2023.
