SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Backtesting Pre Earnings Straddles Using CML TradeMachine


Our members know that buying pre earnings straddles is one of our most consistent and profitable strategies. Yet some options "gurus" continue conducting studies, trying to prove that the strategy doesn't work. Today we will show how to do the backtesting properly, using the CML TradeMachine, the best backtester in the industry.

We already debunked some of those "studies" here and here. Today we will debunk another study, and will show how to do it properly.

On July 7, 2015, tastytrade conducted a study using AAPL, GMCR, AMZN and TSLA. An ATM straddle was purchased 21 days prior to earnings and closed the day before earnings. A table showed the results. The win rate, total P/L, average P/L per day, biggest win and biggest loss were shown:


 image.png

Their conclusion:

image.png

Wait... They concluded that buying volatility prior to earnings doesn't work based on 4 stocks? Why those 4 specific stocks? Why 21 days prior to earnings?

Our members know that those 4 stocks are among the worst to use for this strategy. They also know that entering 21 days prior to earnings is usually way too early (there are some exceptions).

Also, what is a significance of dollar P/L when comparing stocks like AMZN and AAPL? At current prices, AMZN straddle would cost around $8,500 while AAPL straddle around $1,200. Theoretically, if we had a 10% loss on AMZN (-$850) and 50% gain on AAPL ($600), the total P/L would be -$250. But the correct calculation would be total P/L of +40% because we need to give equal dollar weight to all trades.

But lets see how changing just one parameter can change the results dramatically. We will be using AAPL as an example. 

First lets use the study parameter of 21 days.


image.png
Tap Here to See the back-test


Entering 21 days prior to earnings is indeed a losing proposition. But lets change it to 10 days and see what happens:


image.png
Tap Here to See the back-test

 

Can you see how changing one single parameter changes the results dramatically? I have a feeling that tastytrade knew that 21 days would be not the best time to enter - but using different parameters wouldn't fit their thesis.


Now lets test the strategy on some of our favorite stocks.


NKE, 14 days and 15% profit target:

image.png
Tap Here to See the back-test

 


MSFT, 7 days and 15% profit target:
 

image.png
Tap Here to See the back-test


CSCO, 21 days and 10% profit target:

image.png
Tap Here to See the back-test

 

IBM, 7 days and 15% profit target:

image.png
Tap Here to See the back-test

 

ORCL, 14 days and 20% profit target:

image.png
Tap Here to See the back-test


 

WMT, 7 days and 10% profit target:
 

image.png

Tap Here to See the back-test

 


As you can see, different stocks require different timing and different profit targets. Some work better entering 7 days prior to earnings, some might improve performance with an entry as early as 21 days prior to earnings.

The bottom line is: you cannot just select random stocks, combine it with random timing and no trade management, and declare that the strategy doesn't work. But if you select the stocks carefully, combine it with the right timing and trade management, it works very well. Here are our results, based on live trades, not skewed "studies":


image.png
 

Related Articles:

Edited by Kim

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Important Tips For First Time Currency Traders

    Diversifying your portfolio is important for all investors, and currency investments are a great way to do that. However, there are a lot of misconceptions and common mistakes that first time currency investors make, and this leads to big losses.

    By Kim,

    • 0 comments
    • 75 views
  • Iron Condors or Short Strangles?

    In my early option trading days, I favored selling iron condors over selling strangles. I thought that selling a strangle was too risky because the potential loss was “undefined”. I thought this made sense because this is what I’d hear from other people that were more experienced than I was.

    By Jesse,

    • 0 comments
    • 1,201 views
  • How To Be A Successful Day Trader From Home

    The good news is that if trading is your passion, then it’s possible to become a successful day trader and work from home. However, it’s not as easy as setting up shop and jumping online. There are specific steps and processes you need to have in place if you’re going to be able to make a living for yourself and have a bright career and future.

    By Kim,

    • 0 comments
    • 153 views
  • 3 Key Pieces Of Advice For New Traders

    These days, everyone claims to be an ‘expert’ on absolutely everything. Apparently, it only takes having a Twitter account to be a seasoned expert on any given subject; all in all, the Internet is full of nonsense. It’s becoming harder and harder to find legitimate answers amongst the quagmire of false information online.

    By Kim,

    • 0 comments
    • 215 views
  • Why New Traders Fail

    Our first advice to new traders is: "Learn First, Trade Later". The markets will always be there, but if you start trading without proper fundamentals, your capital will be gone very fast. The barrier to enter trading is so low today, commissions are near zero, and the whole trading game looks very promising.

    By Kim,

    • 0 comments
    • 411 views
  • Lumpy Dividends and Options

    Dividend payments, like oatmeal, may be smooth or lumpy. Smooth dividends are predictable, usually once per quarter. It is easy for options traders to believe these dividends are guaranteed, because they usually continue uninterrupted quarter after quarter. This also makes it easy to predict total return over a longer time span.

    By Michael C. Thomsett,

    • 0 comments
    • 384 views
  • Coming to Peace With Market Volatility: Part II

    On April 18th I wrote part I of this article, Coming to Peace With Market Volatility. I showed how the US equity market risk premium, defined as the annual average return of the Total Market minus the return of one-month US Treasury Bills, was a large 8.37% per year from 1950-2019. That’s the good news.

    By Jesse,

    • 0 comments
    • 421 views
  • Ratio Calendar Spreads

    The ratio calendar spread is well-known to some, but for others the risk/reward aspects are not well understood. One way to cover a short position is to own 100 shares of the underlying stock. Another, more creative way is to sell a shorter-term expiration position and buy a longer-term position.

    By Michael C. Thomsett,

    • 0 comments
    • 831 views
  • Studies Vs. Real Trading

    "Who you gonna believe, me or your lying eyes?" Our members and readers know that buying pre earnings straddles has been one of our favorite strategies that produced consistent gains in the last 8 years with very low risk. Yet there is a significant number of studies showing that this strategy has a negative expectation. 

    By Kim,

    • 0 comments
    • 776 views
  • Should You Hedge or Diversify?

    Using the most popular S&P 500 ETF (SPY) to represent the US stock market, this article will look at different ways to manage equity market risk using historical ETF and options data from ORATS Wheel since 2007. We will analyze the following unhedged, hedged and allocation choices:

    By Jesse,

    • 11 comments
    • 1,149 views

  Report Article

We want to hear from you!


There are no comments to display.



Your content will need to be approved by a moderator

Guest
You are commenting as a guest. If you have an account, please sign in.
Add a comment...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

Options Trading Blogs Expertido