Weekly Earnings Commentary
We have officially entered the earnings doldrums, but that certainly doesn’t mean that opportunities won’t present themselves. For instance, this week Costco (COST) and Oracle (ORCL) announce earnings and offer a decent opportunity for an iron condor. I’ve gone over a detailed iron condor example in the “Weekly Trade Ideas” section below.
We’ve made 39 trades in total with a win ratio of 76.9% (30 out of 39 winning trades).
If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
Weekly Watchlist
Costco (COST)
Expected Move or Range: (590 – 630)
Oracle (ORCL)
Expected Move or Range (107 - 120)
Top Earnings Options Plays
Here are a few top earnings options plays for this week (12/11 to 12/15) if you are so inclined:
Images Courtesy of Slope of Hope
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 Thursday after the closing bell.
The stock is currently trading for 610.78.
- IV Rank: 32.4
Expected Move for the December 15, 2023, Expiration Cycle: 590 to 630
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 590 to 630.
If we look at the call side of COST for the December 22, 2023, expiration, we can see that selling the 640 call strike offers an 85.42% probability of success. The short call strike sits just above the expected move, or at 630.
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, 590. The 580 put, with an 86.45% probability of success, works.
We can create a trade with a nice probability of success if COST stays within the 60-point range, or between the 640 call strike and the 580 put strike. Our probability of success on the trade is 85.42% on the upside and 86.45% on the downside.
Moreover, we have a 4.7% cushion to the upside and a 5.1% 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 moves of over 3% to the upside and downside after an earnings announcement, so the wide margins of error of 4.7% to the upside and 5.2% to the downside of the trade seem appealing.
Quick Stats
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 December 22, 2023, 640 calls
Buy to open COST December 22, 2023, 645 calls
Sell to open COST December 22, 2023 580 puts
Buy to open COST December 22, 2023 575 puts for roughly $1.00 or $1.00 per iron condor.
Our margin requirement would be roughly $400 per iron condor. Again, the goal of selling the COST iron condor is to have the underlying stock stay below the 640 call strike and above the 580 put strike immediately after COST earnings are announced.
Here are the parameters for this trade:
- The probability of success – 85.42% (call side) and 86.45% (put side)
- The maximum return on the trade is the credit of $1.00, or $1.00 per iron condor
- Max return: 25.0% (based on $400 margin per iron condor)
- Break-even level: 579 – 641
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 December 18, 2023.