Weekly Earnings Commentary
The earnings doldrums are upon us, but we still have one potential opportunity this week, most notably a chance for a trade in FedEx (FDX). The company is due to announce after the closing bell Wednesday, so if I do send a trade alert, expect to see the alert around 2 p.m. ET that day.
If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
Weekly Watchlist
- FedEx (FDX)
Top Earnings Options Plays
Here are a few top earnings options plays for this week (9/18 to 9/22) if you are so inclined:
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 (Not Official Trade Alerts)
FedEx (FDX)
FedEx (FDX) is due to announce earnings Wednesday after the closing bell.
The stock is currently trading for 254.08.
- IV Rank: 35.6
Expected Move for the September 29, 2023, Expiration Cycle: 240 to 267.5
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 240 to 267.5.
If we look at the call side of FDX for the September 29, 2023, expiration, we can see that selling the 272.5 call strike offers an 85.10% probability of success. The call strike sits just above the expected move, or 267.5.
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 240. The 232.5 put, with an 84.93% probability of success, works.
We can create a trade with a nice probability of success if FDX stays within the 40-point range, or between the 272.5 call strike and the 232.5 put strike. Our probability of success on the trade is 85.10% on the upside and 84.93% on the downside.
Moreover, we have a 6.7% cushion to the upside and a 5.9% margin of error to the downside.
If we look at the earnings reactions since 3/21/2007, we can see that there have been only a few large moves of roughly 10% to the upside or downside after an earnings announcement, so the wide margins of error of 6.7% and 5.8% seem far less appealing … and opportunistic.
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 FDX, I will send a trade alert with updated data):
Simultaneously:
Sell to open FDX September 29, 2023, 272.5 calls
Buy to open FDX September 29, 2023, 277.5 calls
Sell to open FDX September 29, 2023, 232.5 puts
Buy to open FDX September 29, 2023, 227.5 puts for roughly $1.07 or $107 per iron condor.
Our margin requirement would be roughly $393 per iron condor. Again, the goal of selling the FDX iron condor is to have the underlying stock stay below the 272.5 call strike and above the 232.5 put strike immediately after FDX earnings are announced.
Here are the parameters for this trade:
- The probability of success – 85.10% (call side) and 84.93% (put side)
- The maximum return on the trade is the credit of $1.07, or $107 per iron condor
- Max return: 27.2% (based on $393 margin per iron condor)
- Break-even level: 273.57 – 231.43.
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 September 25 2023.