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Earnings Trader
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COI Earnings Trader Issue: September 5, 2023

We officially enter the quiet period for earnings this week. That being said, several companies with decent options liquidity are due to report this week in Kroger (KO) and DocuSign (DOCU). And next week several more are due report, with the highlight being Oracle (ORCL). All of this is basically a reminder that just even though another earnings season has passed us by there are still opportunities, while limited, to be had before the next earnings season begins.

Weekly Earnings Commentary

We officially enter the quiet period for earnings this week. That being said, several companies with decent options liquidity are due to report this week in Kroger (KO) and DocuSign (DOCU). And next week several more are due report, with the highlight being Oracle (ORCL). All of this is basically a reminder that just even though another earnings season has passed us by there are still opportunities, while limited, to be had before the next earnings season begins.

If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.

Weekly Watchlist

  • DocuSign (DOCU)
  • Kroger (KR)

Top Earnings Options Plays

Here are a few top earnings options plays for this week (9/4 to 9/8) if you are so inclined:

COI_ET_090523_earningscalendar.png

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)

DocuSign (DOCU)

DocuSign (DOCU) is due to announce earnings Thursday after the closing bell.

The stock is currently trading for 51.67.

  • IV Rank: 24.3

Expected Move for the September 15, 2023, Expiration Cycle: 45 to 58

COI_ET_090523_expectedmove.png

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 45 to 58.

If we look at the call side of DOCU for the September 15, 2023, expiration, we can see that selling the 60 call strike offers an 85.82% probability of success. The call strike sits just above the expected move, or 58.

COI_ET_090523_bearcall.png

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 45. The 44 put, with an 85.37% probability of success, works.

COI_ET_090523_bullput.png

We can create a trade with a nice probability of success if DOCU stays within the 14-point range, or between the 60 call strike and the 44 put strike. Our probability of success on the trade is 85.82% on the upside and 85.37% on the downside.

Moreover, we have a 16.1% cushion to the upside and a 14.8% margin of error to the downside.

If we look at the earnings reactions since 6/7/2018, we can see that there have been large moves of roughly 20% to the upside or downside after an earnings announcement, so the seemingly wide margin of error of 16.1% and 14.8% seems far less appealing … and opportunistic.

Net Change – At the Opening Bell

COI_ET_090523_open.png

Full Bar – Closing Bell

COI_ET_090523_close.png

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 DOCU, I will send a trade alert with updated data on Thursday):

Simultaneously:

Sell to open DOCU September 15, 2023, 60 calls

Buy to open DOCU September 15, 2023, 65 calls

Sell to open DOCU September 15, 2023, 44 puts

Buy to open DOCU September 15, 2023, 39 puts for roughly $0.79 or $79 per iron condor.

COI_ET_090523_price.png

Our margin requirement would be roughly $421 per iron condor. Again, the goal of selling the DOCU iron condor is to have the underlying stock stay below the 60 call strike and above the 44 put strike immediately after DOCU earnings are announced.

Here are the parameters for this trade:

  • The probability of success – 85.82% (call side) and 85.37% (put side)
  • The maximum return on the trade is the credit of $0.79, or $79 per iron condor
  • Max return: 18.8% (based on $421 margin per iron condor)
  • Break-even level: 60.79 – 43.21.

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 11, 2023.

Andy Crowder is a professional options trader, researcher and Senior Analyst at Cabot. Formerly with Oppenheimer & Co. in New York, Andy has leveraged his investment experience to develop his statistically based options trading strategy which applies probability theory to option valuations in order to execute risk-controlled trades. This proprietary strategy has been refined through two decades of research and real-world experience and has been featured in the Wall Street Journal, Seeking Alpha, and numerous other financial publications. Andy has helped thousands of option traders learn and implement his meticulous rules-driven options trading strategies through highly attended conferences, one-on-one coaching, webinars, and his work as a financial columnist. He currently resides in Bolton Valley, Vermont and when he’s not trading, teaching and writing about options, he enjoys spending time with his wife and two daughters, backcountry skiing, biking, running and enjoying all things outdoors.