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.

Microsoft Pre-earnings Momentum Trade


Microsoft has earnings due out on October 26th, 2017, after the market close, according to Wall Street Horizon. 7-days before then would be October 19th, 2017. Microsoft is the forgotten mega tech -- the third largest company in the world behind Apple and Alphabet, but it doesn't fall into any fun Acronyms, like FANG, or FAANG. 

But, this pre-earnings momentum back-test is unlike any other in that it is the only one, out of more than 4,000 scans, that has never lost over the last three-years. (This does not mean it deserves extra risk capital or that it is somehow infallible, but, we are sharing a fact.) Here we go. 

PREFACE 
There is a bullish momentum trading pattern in Microsoft Corporation (NASDAQ:MSFT) stock 7 calendar days before earnings,
and we can capture that phenomenon explicitly by looking at returns in the option market. The strategy won't work forever, but for now it is a momentum play that has not only returned 851.3%, but has also shown a win-rate of 100% over the last three-years. 

LOGIC 
The logic behind the test is easy to understand -- in a bull market there can be a stock rise ahead of earnings on optimism, or upward momentum, that sets in the one-week before an earnings date. Now we can see it in Microsoft Corporation. 

The Bullish Option Trade Before Earnings in Microsoft Corporation 
We will examine the outcome of getting long a weekly call option in Microsoft Corporation 7-days before earnings (using calendar days) and selling the call before the earnings announcement. 

Here's the set-up in great clarity; again, note that the trade closes before earnings, so this trade does not make a bet on the earnings result. 

setup_7_1_earnings.png



RISK MANAGEMENT 
We can add another layer of risk management to the back-test by instituting and 40% stop loss and a 40% limit gain. Here is that setting: 
 

setup_4040_limit.png



In English, at the close of each trading day we check to see if the long option is either up or down 40% relative to the open price. If it was, the trade was closed. 

Discovery 
We found this pattern by using the TradeMachine™ Pro scanner, searching for stocks that show bullish momentum 7-days before earnings. Here are the top results in the entire market over the last 3-years: 
 

MSFTscanres_92917.png



RESULTS 
Here are the results over the last three-years in Microsoft Corporation: 
 

MSFT: Long 40 Delta Call
 
% Wins: 100%
 
Wins: 12   Losses: 0
 
% Return:  851.3% 

Tap Here to See the Back-test


We see a 851.3% return, testing this over the last 12 earnings dates in Microsoft Corporation. That's a total of just 72 days (6-days for each earnings date, over 12 earnings dates). This has been the results of following the trend of bullish sentiment into earnings while avoiding the actual earnings result. 

This is not a magic bullet, even though it looks so good, there are no guarantees in the market. This is simply a bullish strategy. In the short-term it hasn't seen any losses, but more importantly, whether or not it loses on any given earnings run-up, the 851.3%  return in less than three-full months of trading is predicated on an idea of consistent momentum. 

The trade will lose sometimes, but over the most recent trading history, this momentum and optimism options trade has won ahead of earnings.

Setting Expectations 
While this strategy had an overall return of 851.3%, the trade details keep us in bounds with expectations: 
      ➡ The average percent return per trade was 51.68% over each six-day period. 

Back-testing More Time Periods in Microsoft Corporation 
Now we can look at just the last year as well: 
 

MSFT: Long 40 Delta Call
 
% Wins: 100%
 
Wins: 4   Losses: 0
 
% Return:  230.1% 

Tap Here to See the Back-test


We're now looking at 230.1% returns, on 4 winning trades and 0 losing trades. It's worth noting again that we are only talking about one-week of trading for each earnings release, so this is 230.1% in just 4-weeks of total trading. 
      ➡ The average percent return over the last year per trade was 53.93% over six-days, remarkably similar to the 51.68% average return over the last three-years. 

WHAT HAPPENED 
Bull markets tend to create optimism, whether it's deserved or not. To see how to test this for any stock we welcome you to watch this quick demonstration video: 

Tap Here to See the Tools at Work

Risk Disclosure 
You should read the Characteristics and Risks of Standardized Options

Past performance is not an indication of future results. 

Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment. 

Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.

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

  • The Wheel Trade

    The “wheel” trade is variously described as a beginner’s strategy, a combination to exploit features of both calls and puts, and as “perfect” solution to the well-known risks of shorting calls, even when covered. The wheel could be defined as any of these, but a larger question should be: Is the wheel an elegant method for making profits consistently, or just a gimmick?

    By Michael C. Thomsett,

    • 0 comments
    • 160 views
  • Chooser Options

    Most options traders see their world as a choice between calls or puts, alone or in various combinations. But there is more. With a chooser option, traders can open a position and decide later whether it will be a call or a put. This is also called an as you like it option.

    By Michael C. Thomsett,

    • 0 comments
    • 219 views
  • Leveraged Anchor 2020 Year In Review

    Steady Options has now been trading the Leveraged Anchor strategy for two years, and, somewhat to my surprise, 2020 went even better than 2019. On the year, Leveraged Anchor was up 31.7%, while the total return of the S&P 500 was 18.4%.

    By cwelsh,

    • 2 comments
    • 619 views
  • Ratchet Options

    The “ratchet option” is so-called because as a series, each successive position activates when the previous option has expired. The trader ratchets up (or down) to the next position. Each one is set up to be as close to the money as possible. It has many names, including cliquet, moving strike, ladder, lock-in, or reset option.

    By Michael C. Thomsett,

    • 0 comments
    • 250 views
  • Steady Momentum 2020 Year in Review

    Steady Momentum Put Write (SMPW) is one of the available subscription services at Steady Options. We launched the strategy in early 2019, so we now have two years of performance to evaluate on both an absolute basis and relative to the strategy’s benchmark, PUTW (WisdomTree CBOE S&P 500 PutWrite Strategy Fund). 

    By Jesse,

    • 0 comments
    • 228 views
  • SteadyOptions 2020 Year In Review

    2020 marks our 9th year as a public trading service. It was an excellent year for us. We closed 130 winners out of 194 trades. Our model portfolio produced 117.1% compounded gain on the whole account based on 10% allocation per trade. We had only three losing months in 2020. 

    By Kim,

    • 0 comments
    • 501 views
  • The Jump-Diffusion Pricing Formula

    One of the more complex areas of options analysis involves pricing formulas. The best known among these is the Black Scholes Model (BSM). This is a widely cited method for attempting to determine what the option’s premium should be, but it is deeply flawed.

    By Michael C. Thomsett,

    • 0 comments
    • 281 views
  • Ranges of Exotic Options

    The standard call and put are well known to all option traders, but many exotic and more advanced options can also be opened. Whether a specific broker allows trading in these, and whether a trader has the necessary trading level, are questions to be addressed. This article just defines many of the exotic options that are possible.

    By Michael C. Thomsett,

    • 0 comments
    • 378 views
  • What To Do Before Committing To Trading

    Trading cryptocurrency has become a very popular and significant part of life. While it’s not for everyone, it’s certainly for an awful lot of people. There’s money to be made and areas to be invested in, and people will do what they can to make either a quick buck or an amazing figure.

    By Kim,

    • 0 comments
    • 501 views
  • Accurate Expiration Counting

    Options traders are rightfully concerned with the number of days to expiration of an option. At the time the position is opened, whether long or short, the issue of time decay must be at the forefront of risk evaluation. But is this performed accurately?

    By Michael C. Thomsett,

    • 0 comments
    • 413 views

  Report Article

We want to hear from you!


Thanks, Paul.  Some good info there - not all entirely new to me, but a good! refresher and it clears up the "long 40 delta" (which was what I was guessing it meant).

 Am I to infer then that the exp & strike are any that would give me 40 delta?  For example, MSFT right now has 10/20@75 and 11/3@75.5 (plus others) both around 40 delta.  Is any one preferred over the other, and if so why?

Share this comment


Link to comment
Share on other sites
10 minutes ago, skydragon said:

Thanks, Paul.  Some good info there - not all entirely new to me, but a good! refresher and it clears up the "long 40 delta" (which was what I was guessing it meant).

 Am I to infer then that the exp & strike are any that would give me 40 delta?  For example, MSFT right now has 10/20@75 and 11/3@75.5 (plus others) both around 40 delta.  Is any one preferred over the other, and if so why?

This article is referring to buying the ~40 delta call closest to, but not less than, 7 days to expiration. The article doesn't actually say, but you can click the Back-Test link and figure it out.

Edited by greenspan76

Share this comment


Link to comment
Share on other sites

Thanks, greenspan76.  I'm having trouble loading what I think would be the full backtest page.  I'm not a CMLviz client and I'm going through a proxy server at the moment.  But I think I have what I need for when the 19th rolls around, so I'm good.

Share this comment


Link to comment
Share on other sites

They normally test with 1 lots, so it would be the 'closest' call to 40 delta at the end of the trading day.  You could obviously do as you are suggesting to get it closer for your entire position, but that's what the backtester is doing.

Share this comment


Link to comment
Share on other sites

I'm still a bit of an options novice, but I have a couple observations/questions on this trade.  I invite expert critique.

This is a bullish momentum play (as is well stated).  Thus IMO many bullish trade strategies might be appropriate here.  In other words, the long 40 delta call is just one of many ways to profit.  I do like it, so don't get me wrong, but I am wondering if anyone has reviewed other strategies - for instance varying the delta, or testing another trade type (eg, bull put spread) - to squeeze more gains out of the opportunity (while still keeping risk/reward at a prudent level)?  This sort of analysis is beyond my skill level and time availability.  [This may be a rhetorical question, since the article doesn't actually stress the exclusion of other trade types.]

Secondly (and more importantly), I question the proposed expiration.  Since we are going long, theta is working against us and it accelerates as expiration approaches.  Might a couple months worth of time till exp be a better choice?  I realize that delta and gamma also kick into high gear as exp approaches, and that those factors (and lV as well) could considered such that they best work in our favor...so it becomes a balancing act. Again, it's a bit beyond my grasp to test this.  Also I'm beginning to wonder if I'm just overly 'sweating the small stuff'.

Share this comment


Link to comment
Share on other sites

1. I tried to play with deltas, 40 provides the best results, but other deltas work as well.

2. We want the maximum gamma. Yes, it comes on expense of theta working against us, but IV should keep the theta losses to minimum (similar to our earnings straddles).

Share this comment


Link to comment
Share on other sites

I got in at .95 yesterday, just got out at 1.37. 44% before commissions. It didn't take long to fill at 1.37. I suspect there is more room to run, but hit my target exit, so I exited. Interesting trade....

Share this comment


Link to comment
Share on other sites

Sold half my position for 1.40, 42.8% return. Letting the other half ride for a while longer with a stop limit to see where it goes.

Share this comment


Link to comment
Share on other sites


Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs Expertido