Weekly Earnings Commentary
Earnings season is mostly behind us, but there are a few stragglers yet to report on the calendar. Oracle is on the agenda this week. With an IV rank of 99.9 it makes sense to look at a potential trading opportunity in the company, which I’ve done in the trade ideas below.
The company is due to report after the closing bell today, so if we decide to place a trade look for an alert around mid-day today.
Our total return for this earnings cycle stands at 28.8%, one of our best performing earnings cycles 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.
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.
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
Oracle (ORCL)
Expected Move or Range: (101-124)
Top Earnings Options Plays
Here are a few top earnings options plays for this week (3/11-3/15) 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)
Oracle (ORCL)
Oracle (ORCL) is due to announce earnings Monday (3/11) after the closing bell.
The stock is currently trading for 112.45.
- IV Rank: 99.9
Expected Move for the March 11, 2024, Expiration Cycle: 101 to 124
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 101 to 124.
Since ORCL is due to announce Monday after the close, I want to go with the March 15, 2024 expiration cycle.
If we look at the call side of ORCL for the March 15, 2024, expiration, we can see that selling the 130 call strike offers an 88.98% probability of success. The call strike sits just above the expected move, at 124.
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 101. The 97.5 put, with an 88.58% probability of success, works.
We can create a trade with a nice probability of success if ORCL stays within the 32.5-point range, or between the 130 call strike and the 97.5 put strike. Our probability of success on the trade is 88.98% on the upside and 88.58% on the downside.
Moreover, we have a 15.6% cushion to the upside and a 13.3% margin of error to the downside.
If we look at the earnings reactions since 3/14/1996, we can see that there have only been a few large moves of roughly 12% to the upside and 10% to the downside after an earnings announcement, so the fairly wide margins of error of 15.6% and 13.3% 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 ORCL, I will send a trade alert with updated data):
Simultaneously:
Sell to open ORCL March 15, 2024, 130 calls
Buy to open ORCL March 15, 2024, 135 calls
Sell to open ORCL March 15, 2024, 97.5 puts
Buy to open ORCL March 15, 2024 95 puts for roughly $0.68 or $0.68 per iron condor.
Our margin requirement would be roughly $415 per iron condor. Again, the goal of selling the TGT iron condor is to have the underlying stock stay below the 172.5 call strike and above the 140 put strike immediately after Target’s earnings are announced.
Here are the parameters for this trade:
1. The probability of success – 88.98% (call side) and 88.58% (put side)
2. The maximum return on the trade is the credit of $0.68, or $68 per iron condor
3. Max return: 15.7% (based on $432 margin per iron condor)
4. Break-even level: 130.68 – 96.82.
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 March 18, 2024.
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