Weekly Earnings Commentary
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Earnings season kicked off late last week with the big banks leading the way. We decided to place our first trade of the season in JPMorgan Chase (JPM) by using a 14.5-point range, with our short strikes at 152.5 and 138. We felt comfortable with the range as it was not only well outside of the expected range (141 – 151) for JPM, but covered, on a percentage basis, all earnings moves going back to October 2006. These are the type of setups we prefer to trade.
As you can see from the chart below, JPM opened the day at 148, well within the expected move and our chosen 14.5-point range. But the stock moved relentlessly higher for the next 10 minutes, just above our short call strike, before it found a top at 153.11 and traded there for the next 30 minutes. The rest of the day the stock pushed lower to close the day at 148.50.
We sold the spread for roughly $0.77 the day prior and after testing the short call strike of 152.5 shortly after the open, the price of our iron condor had doubled, but shortly after retraced and by the end of the last few hours of the day our iron condor was trading for less than $0.60 and eventually closed the day at $0.45.
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 35 trades in total with a win ratio of 80% (28 out of 35 winning trades).
If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
Weekly Watchlist
Bank Of America (BAC)
Expected Move or Range: (25 – 29)
Johnson & Johnson (JNJ)
Expected Move or Range (147 - 167)
Morgan Stanley (MS)
Expected Move or Range (69 - 87)
Netflix (NFLX)
Expected Move or Range (322.5 – 387.5)
Tesla (TSLA)
Expected Move or Range (230 – 272.5)
American Express (AXP)
Expected Move or Range (144 - 158)
Top Earnings Options Plays
Here are a few top earnings options plays for this week (10/16 to 10/20) 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)
American Express (AXP)
American Express (AXP) is due to announce earnings Friday before the opening bell.
The stock is currently trading for 151.10.
- IV Rank: 46.1
Expected Move for the October 27, 2023, Expiration Cycle: 144 to 158
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 144 to 158.
If we look at the call side of AXP for the October 27, 2023, expiration, we can see that selling the 162.5 call strike offers an 87.85% probability of success. The call strike sits just above the expected move, or 158.
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 144. The 138 put, with an 87.03% probability of success, works.
We can create a trade with a nice probability of success if AXP stays within the 24.5-point range, or between the 162.5 call strike and the 138 put strike. Our probability of success on the trade is 87.55% on the upside and 87.03% on the downside.
Moreover, we have a 7.6% cushion to the upside and an 8.6% margin of error to the downside.
If we look at the earnings reactions since 10/23/2006, we can see that there have only been a few large moves of roughly 8% to the upside and 7% to the downside after an earnings announcement, so the wide margins of error of 7.6% and 8.6% 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 AXP, I will send a trade alert with updated data):
Simultaneously:
Sell to open AXP October 27, 2023, 162.5 calls
Buy to open AXP October 27, 2023, 167.5 calls
Sell to open AXP October 27, 138 puts
Buy to open AXP October 27, 133 puts for roughly $0.74 or $74 per iron condor.
Our margin requirement would be roughly $426 per iron condor. Again, the goal of selling the AXP iron condor is to have the underlying stock stay below the 162.5 call strike and above the 138 put strike immediately after AXP earnings are announced.
Here are the parameters for this trade:
- The probability of success – 87.85% (call side) and 87.03% (put side)
- The maximum return on the trade is the credit of $0.74, or $74 per iron condor
- Max return: 17.4% (based on $426 margin per iron condor)
- Break-even level: 163.24 – 137.26.
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 October 23, 2023.
