Cabot Options Institute Earnings Trader – Alert (SBUX)
Starbucks (SBUX)
As discussed in our weekly issue, and on our weekly call, I will be taking a position in Starbucks (SBUX) today. SBUX is due to announce earnings after the closing bell today (May 2). The stock is currently trading for 113.60.
IV Rank: 26.6
Expected Move for the May 12, 2023, Expiration Cycle: 108 to 119
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 108 to 119.
If we look at the call side of SBUX for the May 12, 2023, expiration, we can see that selling the 123 call strike offers an 89.85% probability of success. The 123 call strike sits just above the expected move, or 119. We can define our risk by buying the 128 call, thereby creating a five-strike-wide bear call spread at the 123/128 call strikes.
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 108. The 105 put, with an 83.36% probability of success, works. Staying with a five-strike-wide spread we can buy the 100 put to define our risk and create a bull put spread at the 105/100 strikes.
We can create a trade with a nice probability of success if SBUX stays within the 18-point range, or between the 123 call strike and the 105 put strike. Our probability of success on the trade is 89.85% on the upside and 83.36% on the downside.
Moreover, we have an 8.3% cushion to the upside and a 7.5% margin of error to the downside…
Earnings Reaction – At the Open
Earnings Reaction – At the Close (intraday move)
Courtesy of Slope of Hope
Here is the trade:
Simultaneously:
Sell to open SBUX May 12, 2023, 123 calls
Buy to open SBUX May 12, 2023, 128 calls
Sell to open SBUX May 12, 2023, 105 puts
Buy to open SBUX May 12, 2023, 100 puts for roughly $0.65 or $65 per iron condor
Our margin requirement would be $435 per iron condor. Again, the goal of selling the SBUX iron condor is to have the underlying stock stay below the 123 call strike and above the 105 put strike immediately after SBUX earnings are announced.
Here are the parameters for this trade:
- The probability of success – 89.85% (call side) and 83.36% (put side)
- The maximum return on the trade is the credit of $0.65, or $65 per iron condor
- Max return: 14.9%
- Break-even level: 123.65 – 104.35
As always, if you have any questions, please feel free to email me at andy@cabotwealth.com.