Weekly Earnings Commentary
Before I get started I wanted everyone to be aware that the next Earnings Trader issue will go out next Tuesday (February 20) due to the upcoming market holiday on Monday.
We made our fourth straight successful trade for this earnings cycle late last week. We were thankful to take quick profits in Amgen (AMGN) Wednesday morning. All went as planned as AMGN opened well within the chosen range of our iron condor and, as a result, we were able to take off the trade for a nice one-day gain of 5.6%. Our total return for this earnings cycle stands at 28.8%, one of our best performing earnings cycle since we initiated Earnings Trader back in mid-July 2022, smack dab in the middle of the most recent bear market.
The portfolio now stands at an all-time high of 97.6% in total returns.
As I discussed in our most recent subscriber-only webinar, this week is fairly slow for trading opportunities. As I pointed out last Friday on our call, Walmart (WMT) is offering an interesting trading set-up. Unfortunately, WMT isn’t due to announce until before the opening bell after the upcoming market holiday next Monday. Because of the timing of the announcement, if we decide to take a trade in WMT we will need to make the trade this Friday around mid-day. I take an initial look at what WMT is offering for a potential set-up in the “Trade Ideas” section below.
Remember, even though these are short-term trades, this is a long-term strategy – a strategy based on the law of large numbers and statistical probabilities.
As we start to take on more trades, ALWAYS remember that risk management is key. If one trade stresses you out your position size is way too large. Pare it back. Position size is the only true way to manage risk using this approach. Yes, in almost every case, we will be able to get out for far less than a max loss, but stop-losses are only secondary to position size when managing risk. So please don’t overlook the importance of choosing an appropriate level of position size. Every investor will have a different level of risk tolerance, but without understanding your own risk-reward per trade, you are surely destined to create unnecessary challenges. Make it easy on yourself.
We’ve made 43 trades in total with a win ratio of 79.1% (34 out of 43 winning trades).
If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.
Weekly Watchlist
Cisco Systems (CSCO)
Expected Move or Range: (47-53)
Occidental Petroleum (OXY)
Expected Move or Range (55-60)
Coinbase (COIN)
Expected Move or Range (120-165)
DraftKings (DKNG)
Expected Move or Range (37-49)
Walmart (WMT)
Expected Move or Range (162-176)
Top Earnings Options Plays
Here are a few top earnings options plays for this week (2/12-2/16) if you are so inclined:
Images Courtesy of Slope of Hope
Trade Ideas for This 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)
Walmart (WMT)
Walmart (WMT) is due to announce earnings next Tuesday (2/20) before the opening bell.
The stock is currently trading for 169.28.
- IV Rank: 67.0
Expected Move for the February 23, 2024, Expiration Cycle: 162 to 176
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 162 to 176.
If we look at the call side of WMT for the February 23, 2024, expiration, we can see that selling the 180 call strike offers an 86.97% probability of success. The call strike sits just above the expected move, at 185.
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 162. The 160 put, with an 84.38% probability of success, works.
We can create a trade with a nice probability of success if WMT stays within the 20-point range, or between the 180 call strike and the 160 put strike. Our probability of success on the trade is 86.97% on the upside and 84.38% on the downside.
Moreover, we have a 6.3% cushion to the upside and a 5.8% margin of error to the downside.
If we look at the earnings reactions since 5/14/1996, we can see that there have only been a few large moves of roughly 5% to the upside and 5% to the downside after an earnings announcement, so the fairly wide margins of error of 6.3% and 5.5% seem appealing … and more importantly, opportunistic.
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 WMT, I will send a trade alert with updated data):
Simultaneously:
Sell to open WMT February 23, 2024, 180 calls
Buy to open WMT February 23, 2024, 185 calls
Sell to open WMT February 23, 2024, 160 puts
Buy to open WMT February 23, 2024 155 puts for roughly $0.75 or $75 per iron condor.
Our margin requirement would be roughly $425 per iron condor. Again, the goal of selling the WMT iron condor is to have the underlying stock stay below the 180 call strike and above the 160 put strike immediately after WMT earnings are announced.
Here are the parameters for this trade:
1. The probability of success – 86.97% (call side) and 84.38% (put side)
2. The maximum return on the trade is the credit of $0.75, or $75 per iron condor
3. Max return: 17.6% (based on $425 margin per iron condor)
4. Break-even level: 180.75 – 159.25.
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 February 20, 2024.
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