Cabot Options Institute Earnings Trader – Latest (WMT, HD)
Walmart (WMT)
As discussed in our weekly issue last week, and on our weekly call, I will be taking a position in Walmart (WMT) today. WMT is due to announce earnings before the opening bell Tuesday (November 15). The stock is currently trading for 139.97.
IV Rank: 68.9
Expected Move for the November 18, 2022, Expiration Cycle: 133 to 147
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 133 to 147.
If we look at the call side of WMT for the November 18, 2022, expiration, we can see that selling the 150 call strike offers an 84.12% probability of success. The 150 call strike sits just above the expected move, or 147. We can define our risk by buying the 155 call, thereby creating a five-strike-wide bear call spread at the 150/155 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 133. The 127 put, with a 91.74% probability of success, works. Staying with a five-strike-wide spread, I can buy the 122 put to define our risk and create a bull put spread at the 127/122 strikes.
We can create a trade with a nice probability of success if WMT stays within the 23-point range, or between the 150 call strike and the 127 put strike. Our probability of success on the trade is 84.12% on the upside and 91.74% on the downside.
Moreover, we have a 7.2% cushion to the upside and a 9.3% margin of error to the downside …
Courtesy of Slope of Hope
Here is the trade:
Simultaneously:
Sell to open WMT November 18, 2022, 150 calls
Buy to open WMT November 18, 2022, 155 calls
Sell to open WMT November 18, 2022, 127 puts
Buy to open WMT November 18, 2022, 122 puts for roughly $0.70 or $70 per iron condor
Our margin requirement would be $430 per iron condor. Again, the goal of selling the WMT iron condor is to have the underlying stock stay below the 150 call strike and above the 127 put strike immediately after WMT earnings are announced.
Here are the parameters for this trade:
The probability of success – 89.50% (call side) and 84.18% (put side)
The maximum return on the trade is the credit of $0.70 or $70 per iron condor
Max return: 16.3%
Breakeven level: 150.70 – 126.30
Home Depot (HD)
Like WMT, as discussed in our weekly issue last week, and on our weekly call, I will be taking a position in Home Depot (HD) today. HD is due to announce earnings before the opening bell Tuesday (November 15). The stock is currently trading for 309.67.
IV Rank: 42.1
Expected Move for the November 18, 2022, Expiration Cycle: 293 to 326
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 293 to 326.
If we look at the call side of HD for the November 18, 2022, expiration, we can see that selling the 335 call strike offers a 89.30% probability of success. The 335 call strike sits just above the expected move, or 326. We can define our risk by buying the 340 call, thereby creating a five-strike-wide bear call spread at the 335/340 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 293. The 280 put, with a 89.02% probability of success, works. Staying with a five-strike-wide spread, I can buy the 275 put to define our risk and create a bull put spread at the 280/275 strikes.
We can create a trade with a nice probability of success if HD stays within the 55-point range, or between the 335 call strike and the 280 put strike. Our probability of success on the trade is 89.30% on the upside and 89.02% on the downside.
Moreover, we have an 8.2% cushion to the upside and a 9.6% margin of error to the downside …
Courtesy of Slope of Hope
Here is the trade:
Simultaneously:
Sell to open HD November 18, 2022, 335 calls
Buy to open HD November 18, 2022, 340 calls
Sell to open HD November 18, 2022, 280 puts
Buy to open HD November 18, 2022, 275 puts for roughly $0.77 or $77 per iron condor
Our margin requirement would be $423 per iron condor. Again, the goal of selling the HD iron condor is to have the underlying stock stay below the 335 call strike and above the 280 put strike immediately after HD earnings are announced.
Here are the parameters for this trade:
The probability of success – 89.30% (call side) and 89.02% (put side)
The maximum return on the trade is the credit of $0.77, or $77 per iron condor
Max return: 18.2%
Breakeven level: 335.77 – 279.23