Weekly Earnings Commentary
Earnings are due to officially begin in just over two weeks with the big banks reporting. Until then, the market gods offer up the liveliest week of the earnings doldrums with several potential opportunities, most notably in COST (COST), Micron (MU) and Nike (NKE). I’ll take a closer look at a potential Costco trade In the Trade Ideas section below.
If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
Weekly Watchlist
- Costco (COST)
Expected Move or Range: (530 – 587.5)
- Micron (MU)
Expected Move or Range (64 – 74)
- Nike (NKE)
Expected Move or Range (85 – 96)
Top Earnings Options Plays
Here are a few top earnings options plays for this week (9/25 to 9/29) 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)
Costco (COST)
Costco (COST) is due to announce earnings Tuesday after the closing bell.
The stock is currently trading for 558.59.
- IV Rank: 37.4
Expected Move for the September 29, 2023, Expiration Cycle: 530 to 587.5
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 530 to 587.5.
If we look at the call side of COST for the September 29, 2023, expiration, we can see that selling the 600 call strike offers an 88.05% probability of success. The call strike sits just above the expected move, or 587.5.
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 530. The 515 put, with an 87.14% probability of success, works.
We can create a trade with a nice probability of success if COST stays within the 85-point range, or between the 600 call strike and the 515 put strike. Our probability of success on the trade is 88.05% on the upside and 87.14% on the downside.
Moreover, we have a 7.4% cushion to the upside and a 7.8% margin of error to the downside.
If we look at the earnings reactions since 12/13/2006, we can see that there have only been a few large moves of roughly 4% to the upside and only 5% to the downside after an earnings announcement, so the wide margins of error of 7.4% and 7.8% seem appealing … and more importantly, 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 COST, I will send a trade alert with updated data):
Simultaneously:
Sell to open COST September 29, 2023, 600 calls
Buy to open COST September 29, 2023, 605 calls
Sell to open COST September 29, 2023, 515 puts
Buy to open COST September 29, 2023, 510 puts for roughly $0.91 or $91 per iron condor.
Our margin requirement would be roughly $409 per iron condor. Again, the goal of selling the COST iron condor is to have the underlying stock stay below the 600 call strike and above the 515 put strike immediately after COST earnings are announced.
Here are the parameters for this trade:
- The probability of success – 88.05% (call side) and 87.14% (put side)
- The maximum return on the trade is the credit of $0.91, or $91 per iron condor
- Max return: 22.2% (based on $409 margin per iron condor)
- Break-even level: 600.91 – 514.09.
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 2, 2023.