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:
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
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.
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.
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
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 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.
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.