July 20th, 2023
Companies to Watch for the Second Half of 2023
The Goldilocks scenario keeps playing out in the market, giving the bulls enough to take this market higher. We recently saw bank earnings come in better than anticipated while European inflation data came in cooler than expected, showing that disinflation is occurring globally. The market has already priced in a 96% chance for a 0.25% interest rate hike at the next FOMC meeting on July 25-26. With that, the markets ripped higher ahead of tech earnings, but the question is – can tech keep the party rolling?
While growth is going to be difficult to come by, companies are creating value by reducing expenses and getting creative with their offerings. Let’s look at Netflix (NFLX).
The company is now facing a writers union and actors union strike, more competition, and skyrocketing costs. They elected to crack down on password sharing while introducing an ad-supported plan. They are also removing their cheapest ad-free option to help push those users to the next level up.
It’s that creativity that will keep NFLX on top. That’s not to say people won’t find a reason to complain about their earnings report or sell the stock for not delivering the expected results.
The companies that will do the best over the second half of the year will be those who continue to adapt to the changing environment. Rear earnings reports and see which companies are developing plans for a low-growth economic environment.
The medium-term trend for the broader market remains in bullish mode, especially the way the earnings season is shaping up so far. It’s important to note that the risks of a pullback increase with every day, especially as some indices like the Russell 2000 and some sectors have gained an average of 1% a day over the last week.
Today’s trade idea is an earnings play on Capital One Financial (COF). The smaller banks have shown that earnings aren’t as bad as expected and we haven’t had a bank failure in a number of months. The stock is set to release earnings after the close. I’m ok holding this trade through earnings and up to expiration.
Since I don’t know how the market will react to earnings, I want to set up a trade that allows the stock to move in either direction.
This is going to be done by setting up a double diagonal spread. This is going to cost a debit to enter. It involves trading 4 option legs, which can be entered at the same time.
Here’s how the order looks (using pre-market prices):
Buy to open 28 JUL 120 call
Buy to open 28 JUL 109 put
Sell to open 21 JUL 120 call
Sell to open 21 JUL 109 put
The debit of this trade is around 0.85 plus commissions.
The profit/loss graph looks like this:
COF can trade anywhere between 105 and 130 by expiration, this upcoming Friday, and could theoretically return profits. If COF closes this Friday at $120, this position could return $300 on the initial $85 investment.
There are a couple of ways you can exit the trade. One way is to exit at 10-20% of the peak of one of the triangles. In this case, the left peak at its max is $180 and the right peak at its max is $300. So you could set a GTC order and exit at 10-20% of either of those peaks – your pick.
If you’re open to risk, you can hold this through expiration on Friday as long as COF is trading within the profit zone.
Or you can get out if the stock crosses above or below the breakeven line at expiration. The closing strategy is up to you, but here’s an idea that gives the stock plenty of room to move during its earnings report, with a bullish bias.
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Jeff Wood
Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab
