Weekly Earnings Commentary
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As we discussed on our call last week, it was a slow week for trading and, well, I’m mostly thankful for it.
I received a brief and to-the-point email from a subscriber (who prefers using short strangles and trades far more often) that summed up last week perfectly:
28 stocks on my list to check
16 investigated further
9 trades
4 moved more than 10% up
6 closed at a profit
3 carried over into next week
Of the original 28 I started with ,11 of them moved up over 10% and 1 moved down more than 10% - without a doubt the most volatile week of 2023.
Sometimes the best trade is the one not placed. While we’ve seen a few slow earnings cycles for trading, we never want to force trades. As always, opportunities will pick up. Until then, I still expect, well hope, that we will have 6 to 7 trades under our belt before the earnings season is behind us in a few weeks. And this week is a slow one, with DIS and WYNN at the top of the list. But the following week, the last “big” week of earnings, brings on big retail as Home Depot (HD), Walmart (WMT), Target (TGT), among several others, report. The potential opportunities are there, it’s just a matter of what the market is giving us at the time and if it’s enough to meet our criteria.
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 37 trades in total with a win ratio of 81.1% (30 out of 37 winning trades).
If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
Weekly Watchlist
Pfizer (PFE)
Expected Move or Range: (30 - 33)
Disney (DIS)
Expected Move or Range (79 - 91)
Wynn Resorts (WYNN)
Expected Move or Range (87 - 98)
Top Earnings Options Plays
Here are a few top earnings options plays for this week (11/06 to 11/10) 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)
Wynn Resorts (WYNN)
Wynn Resorts (WYNN) is due to announce earnings Thursday after the closing bell.
The stock is currently trading for 92.76.
- IV Rank: 21.3
Expected Move for the November 17, 2023, Expiration Cycle: 87.5 to 98
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 87 to 98.
If we look at the call side of WYNN for the November 17, 2023, expiration, we can see that selling the 100 call strike offers an 86.08% probability of success. The call strike sits just above the expected move, or at 98.
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, 86. The 84 put, with an 86.42% probability of success, works.
We can create a trade with a nice probability of success if WYNN stays within the 16-point range, or between the 100 call strike and the 84 put strike. Our probability of success on the trade is 86.08% on the upside and 86.42% on the downside.
Moreover, we have a 7.8% cushion to the upside and a 9.4% margin of error to the downside.
If we look at the earnings reactions since 11/07/2006, we can see that there have only been a few large moves of roughly 6% to the upside and 6% to the downside after an earnings announcement, so the wide margins of error of 7.8% to the upside and 9.4% to the downside of the trade seem appealing … and more importantly, opportunistic.
Yes, there was a stretch between 2015 and 2019 when WYNN saw losses of 10%+, but through its history, these outsize reactions have been anomalies. Buy hey, that certainly doesn’t mean they can’t happen again, right? Just another reason to keep risk management at the forefront of all your trading decisions.
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 WYNN, I will send a trade alert with updated data):
Simultaneously:
Sell to open WYNN November 17, 2023, 100 calls
Buy to open WYNN November 17, 2023, 105 calls
Sell to open WYNN November 17, 2023 84 puts
Buy to open WYNN November 17, 2023 79 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 WYNN iron condor is to have the underlying stock stay below the 100 call strike and above the 84 put strike immediately after WYNN earnings are announced.
Here are the parameters for this trade:
- The probability of success – 86.08% (call side) and 86.42% (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: 100.68 – 83.32
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 13, 2023.
