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.

Two Pre-earnings Momentum Trades With a Technical Trigger in Alphabet


Both option trading backtest approaches rely on the fact that there has been a bullish momentum pattern in Alphabet stock 7 calendar days before earnings. Further, we use moving averages as a safety valve to try to avoid opening a bullish position while a stock is in a technical break down, like the fourth quarter of 2018. 

Backtest 1: The Bullish Option Trade Before Earnings in Alphabet Inc

We start with the backtest that shows a higher historical return, but lower historical win rate. 

We will examine the outcome of getting long a weekly call option in Alphabet Inc 7-days before earnings (using calendar days) and selling the call before the earnings announcement if and only if the stock price is above the 50-day simple moving average. 

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

setup_7_0_earnings.png



And here is the technical analysis -- note only one is "turned on," and that is the 50-day moving average requirement.: 
 

setup_above_50dma.png



Here's a visual representation, where the stock price 7-days before earnings (circled) is above the 50-day moving average (black line), and therefore triggers a back-test. 
 

momentum_technical_50dma_zoom.png



If the stock price fails the technical requirement, it's fine, we just put a pin in it and check next quarter. 
 

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. 
 

RESULTS

Here are the results over the last three-years in Alphabet Inc: 
 

GOOGL: Long 40 Delta Call
 
% Wins: 70%
 
Wins: 7   Losses: 3
 
% Return:  277% 

Tap Here to See the Back-test


The mechanics of the TradeMachine® stock option backtester are that it uses end of day prices for every back-test entry and exit (every trigger). 

Notice that while this is a 3-year back-test and we would expect four times that many earnings triggers (4 earnings per year), the technical requirement using the 50-day moving average has avoided 2 pre-earnings attempts. In other words -- it's working. 
 

Setting Expectations

While this strategy had an overall return of 277%, the trade details keep us in bounds with expectations: 
      ➡ The average percent return per trade was 27.6%. 
 

Backtest 2: The "Not Bearish" Option Trade Before Earnings in Alphabet Inc

With a similar set-up, we examine the same phenomenon -- that is, pre-earnings bullish momentum. But, this time, rather than backtesting owning a call option with the earnings date occurring in the options expiration period, we look at the other side. 

We examine selling a put spread in options that expire before earnings are announced. Specifically, we look at opening the trade 7 calendar days before earnings, selling a 40 delta / 10 delta put spread, in options that expire the closest to 5-days but before the earnings date. We don't us any stops or limits -- this backtest simply waits until expiration. 

We also note that the technical requirements with the stock above the 50-day moving average, are identical -- this should result in the same number of trades. 

This is a trade, unlike the long call, that takes a position on the stock that is simply "not bearish," as opposed to aggressively bullish. 
 

RESULTS

Here are the results over the last three-years in Alphabet Inc for the short put spread -- again, since these options are selected to expire before the earnings dates, this backtest does not take earnings risk. 
 

GOOGL: Short 40 / 10 Delta put Spread
 
% Wins: 100%
 
Wins: 10   Losses: 0
 
% Return:  161% 

Tap Here to See the Back-test


The mechanics of the TradeMachine® stock option backtester are that it uses end of day prices for every back-test entry and exit (every trigger).
 

Setting Expectations

While this strategy had an overall return of 161%, the trade details keep us in bounds with expectations: 
      ➡ The average percent return per trade was 20.5%. 
 

Decision

So, there you have it in black and white. Owning the pre-earnings call yielded a substantially higher return, but with a 70% win rate, and the 3 losses, they were substantial, averaging -33.5%. returns (losses). 

This is in contrast to the short put spread which has yielded considerably smaller returns, but no losses in the last 3-years. 
 

Is This Just Because Of a Bull Market?


It's a fair question to ask if these returns are simply a reflection of a bull market rather than a successful strategy. It turns out that this phenomenon of pre-earnings optimism also worked very well during 2007-2008, when the S&P 500 collapsed into the "Great Recession." 
 

SPX2007-2009.png



The average return for this strategy, by stock, using the Nasdaq 100 and Dow 30 as the study group, saw a 45.3% return over those 2-years. And, of course, these are just 8 trades per stock, each lasting 7 days. 

* Yes. We are empirical. 

Back-testing More Time Periods in Alphabet Inc 
Now we can look at just the last year as well. We start with the long call back-test in which the options include the earnings date within the expiration period. 
 

GOOGL: Long 40 Delta Call
 
% Wins: 100.00%
 
Wins: 2   Losses: 0
 
% Return:  115% 

Tap Here to See the Back-test



And now we can look at the short put spread in which the options exclude the earnings date within the expiration period. 
 

GOOGL: Short 40 / 10 Delta Put Spread
 
% Wins: 100.00%
 
Wins: 2   Losses: 0
 
% Return:  42.3% 

Tap Here to See the Back-test



Again, the contrast is clear, but the decision is personal and not obvious. 
 

WHAT HAPPENED

Don't trade blind, please. Try pattern recognition

Risk Disclosure 
Past performance is not an indication of future results. 
 

Ophir Gottlieb is the CEO & Co-founder of Capital Market Laboratories. Mr Gottlieb’s learning background stems from his graduate work in mathematics and measure theory at Stanford University and his time as an option market maker. He has been cited by Yahoo! Finance, CNNMoney, MarketWatch, Business Insider, Reuters, Bloomberg, Wall St. Journal, Dow Jones Newswire, Barron’s, Forbes, SF Chronicle, Chicago Tribune and Miami Herald. He created and authored what was believed to be the most heavily followed option trading blog in the world for three-years.


Related articles:

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
    • 43 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
    • 1,127 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
    • 142 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
    • 207 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
    • 400 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
    • 378 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
    • 412 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
    • 822 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
    • 768 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
    • 1,137 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