CMLviz Trade Machine

RapperT · June 17, 2017

edit: bad link..stand by

Edited June 17, 2017 by RapperT

Yowster · June 17, 2017

10 minutes ago, RapperT said:

thanks @Yowster, but we wouldnt want to close the entire trade 5 days prior to earnings (in all cases). That's the piece I cant seem to get right. That and having the shorts set to 7 day roll and opening when I have the long open.

I would only really (initially) be backtesting underlying that I identified as having necessary IV run up into earnings to make sense as earnings straddles (to your RV point)

I'll play with your set up, interested to see what @Ophir Gottlieb comes up with

@RapperTIts not closing 5 days prior to earnings in all cases, that depends on what day of the week earnings is for that company. If earnings is on the Monday its closing 1 day prior to earnings, if earnings is Thursday its closing 4 days prior to earnings. So I think you'll have to tweak that days prior to number depending on what day of the week a company reports (and if a company reports on different days of the week on different earnings cycles then you may have to download the detailed trades and tweak the data as necessary if you want to be 100% accurate).

Edited June 17, 2017 by Yowster

RapperT · June 17, 2017

3 minutes ago, Yowster said:

@RapperTIts not closing 5 days prior to earnings in all cases, that depends on what day of the week earnings is for that company. If earnings is on the Monday it closing 1 day prior to earnings, if earnings is Thursday its closing 4 days prior to earnings. So I think you'll have to tweak that days prior to number depending on what day of the week a company reports (and it a company reports on different days then you may have to download the detailed trades and tweak the data as necessary).

hmmm. Ok i'll mess around with it. This may not be super efficient for what im trying to do

Yowster · June 17, 2017

7 minutes ago, RapperT said:

hmmm. Ok i'll mess around with it. This may not be super efficient for what im trying to do

@RapperTBTW, the tool seems to be using the wrong date for NKE Dec 2016 earnings. The actual earnings data was 12/20, but the tool thinks it was later. Net result is that the short strangle was using options expiring after earnings, which is not how the trade is designed to work. This is now the 2nd time I've seen incorrect earnings dates being used (AMZN was the other case).

Edited June 17, 2017 by Yowster

RapperT · June 17, 2017

I took down my link because something was wonky but i didnt catch that...

Kim · June 18, 2017

10 hours ago, izzo70 said:

@Kim Will you be using this tool to add to the list of SO strategies (i.e. post earnings)? If strategies arise that out perform one or some of our current strategies, will we try them out? Or is it more for individual use and strategizing outside of official SO trades. (If this has already been addressed i apologize in advance as i didnt read all 10 pages of post.) Thanks

It's really up to you. I'm always looking for new strategies to incorporate into our official model portfolio, and if members come with new ideas that look good, I'm always open to try them.

Ophir Gottlieb · June 18, 2017

Hey guys,

I am answering a bunch of questions at once here, so take your time perusing this post.

1. Earnings timing:

If you want your strategy to use options that expire AFTER earnings, even if you are closing the position before earnings using the custom earnings handling make sure:

Rollover >= Open Days Before Earnings

Examples:

Open Days Before Earnings	Rollover	Expiration Time
10	7	Select an expiry that expires before earnings
7	7	Select an expiry that expires after earnings
29	30	Select an expiry that expires after earnings

So, in a meaningful example, let's pretend we wanted to open a strategy 7 days before earnings AND we want the options to have expirations AFTER earnings. We stat with this:

And we make our rollover is 7 days or more, so this is ok:

This will buy a monthly straddle and sell a weekly straddle but both expirations chosen will be AFTER earnings.

If, instead, you wanted the short straddle to expire BEFORE earnings, then you could make the rollover 6 days or make the "open position days before earngins" 8 days.

2. Rolling options before the they expire

An example here is selling a put spread with 30 day options but rolling it every 7 days (or whatever).

There is a way to test it, however it requires a trick. Here it is the custom strategy:

What we have done here is entered a credit spread with 30 options (for example) and then added a 7 day option with a trivial delta (to keep the price low). Then we have 'checked the box that reads "Close all legs with front month options".

This will force the 30 day option spreads to close with the 7 day option, and then it will all roll again.

If you use this as a proxy for your back-test, note your commissions and adjust them a little. We used a 5-lot credit spread and only a 1-lot weekly option to reduce the unintended commissions. Since you are testing a spread, this will have no impact on your "amount risked" and since it's a very cheap option (1 delta) it should have very little effect on your return %.

This is a bit of trick here, but it works extremely well.

3. Days before earnings and after earnings

We use TRADING days up to 7 days. So:

Earnings Day	Day Before	Day After
Monday	Friday	Tuesday
Tuesday	Monday	Wednesday
Wednesday	Tuesday	Thursday
Thursday	Wednesday	Friday
Friday	Thursday	Monday

Also, "0 Days Before Earnings" and "0 Days After Earnings" are the same day

OK, that's it!

Happy Sunday to tall!

Edited June 19, 2017 by Ophir Gottlieb

Darcy MacDonald · June 18, 2017

So I've been experimenting with butterflies on RUT (balanced ones, not broken wing). I cam up with this using puts:

http://tm.cmlviz.com/index.php?share_key=DsmflSzQHWR3pWFX

The results are fantastic, but after digging into it, I realized that the strikes are unbalanced. I think the backtesting is picking strikes based on the closest delta, which may not always be balanced. I'm guessing that when they're unbalanced, the margin requirement goes up, which skews the percentage gains calc?

Ophir Gottlieb · June 18, 2017

3 minutes ago, Darcy MacDonald said:

So I've been experimenting with butterflies on RUT (balanced ones, not broken wing). I cam up with this using puts:

http://tm.cmlviz.com/index.php?share_key=DsmflSzQHWR3pWFX

The results are fantastic, but after digging into it, I realized that the strikes are unbalanced. I think the backtesting is picking strikes based on the closest delta, which may not always be balanced. I'm guessing that when they're unbalanced, the margin requirement goes up, which skews the percentage gains calc?

That's right.

But as an aside, 50 delta custom strategies will always choose the same strike, so it will be correct.

Ophir Gottlieb · June 19, 2017

Trading Patterns of Optimism Has Meant Remarkable Returns for Twitter Inc

Date Published: 2017-06-19
Written by Ophir Gottlieb

LEDE
Twitter Inc (NYSE:TWTR) has a pattern of missing earnings and a stock drop after the fact. But, the incredible phenomenon comes right before earnings -- no matter how many times Twitter disappoints, optimism tends to build just before the earnings release, and that is a tradeable phenomenon.

This is how people profit from the option market -- it's attention to detail rather than hope.

The Trade Before Earnings
Selling a put spread is simply a bet that a stock "won't go down very much." Doing so Twitter has been a disaster -- as the stock has fallen so has a short put spread trader been eviscerated.

But we don't care about the stock movements on whole, what we care about is a repeatable pattern and for Twitter that has meant optimism, or least a lack of pessimism, ahead of earnings.

THE TRADE
What we want to test is selling at out-of-the-money put spread in Twitter two-weeks before earnings which expires before earnings. We don't want to make an earnings bet, we simply want to ride the immoveable optimism in the stock right before earnings. Here is the set-up:

And here are the results, side-by-side with selling a put spread every month.

Go to the back-test link

We see a 59% losing trade turn into a 72.7% winning trade and we also see the win-rate go from 64% to 83%. Even further, the left-hand side required trading every two-weeks for three-full years, whereas this pre-earnings trade only happened 12 times (one for each earning release) for a total of 24-weeks of trading.

Consistent
This "optimism," or really, "lack of pessimism," in Twitter stock right before earnings has been a consistent pattern. Here are the results over the last two-years:

Go to the back-test link

We're now looking at nearly 29% returns on 6 winning trades and 2 losing trades. It's worth noting again that we are only talking about two-weeks of trading for each earnings release, so this 29% in just 24-weeks.

For completeness, we include the results over the two most recent earnings events (6-moths).

Go to the back-test link

That's 25% on 4-weeks of trading or a whopping 325% annualized return without once taking the risk of an actual earnings release.

WHAT HAPPENED
This is how people profit from the option market -- it's preparation, not luck. It's attention to detail rather than hope. To see how to do this for any stock and for any strategy, including covered calls, with just the click of a few buttons, we welcome you to watch this quick demonstration video:
Tap Here to See the Tools at Work

Thanks for reading.

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.

The author has no position in Twitter Inc (NYSE:TWTR) as of this writing.

Go to the back-test link

cuegis · June 20, 2017

3 hours ago, Ophir Gottlieb said:

Trading Patterns of Optimism Has Meant Remarkable Returns for Twitter Inc

Date Published: 2017-06-19
Written by Ophir Gottlieb

LEDE
Twitter Inc (NYSE:TWTR) has a pattern of missing earnings and a stock drop after the fact. But, the incredible phenomenon comes right before earnings -- no matter how many times Twitter disappoints, optimism tends to build just before the earnings release, and that is a tradeable phenomenon.

This is how people profit from the option market -- it's attention to detail rather than hope.

The Trade Before Earnings
Selling a put spread is simply a bet that a stock "won't go down very much." Doing so Twitter has been a disaster -- as the stock has fallen so has a short put spread trader been eviscerated.

But we don't care about the stock movements on whole, what we care about is a repeatable pattern and for Twitter that has meant optimism, or least a lack of pessimism, ahead of earnings.

THE TRADE
What we want to test is selling at out-of-the-money put spread in Twitter two-weeks before earnings which expires before earnings. We don't want to make an earnings bet, we simply want to ride the immoveable optimism in the stock right before earnings. Here is the set-up:

And here are the results, side-by-side with selling a put spread every month.

Go to the back-test link

We see a 59% losing trade turn into a 72.7% winning trade and we also see the win-rate go from 64% to 83%. Even further, the left-hand side required trading every two-weeks for three-full years, whereas this pre-earnings trade only happened 12 times (one for each earning release) for a total of 24-weeks of trading.

Consistent
This "optimism," or really, "lack of pessimism," in Twitter stock right before earnings has been a consistent pattern. Here are the results over the last two-years:

Go to the back-test link

We're now looking at nearly 29% returns on 6 winning trades and 2 losing trades. It's worth noting again that we are only talking about two-weeks of trading for each earnings release, so this 29% in just 24-weeks.

For completeness, we include the results over the two most recent earnings events (6-moths).

Go to the back-test link

That's 25% on 4-weeks of trading or a whopping 325% annualized return without once taking the risk of an actual earnings release.

WHAT HAPPENED
This is how people profit from the option market -- it's preparation, not luck. It's attention to detail rather than hope. To see how to do this for any stock and for any strategy, including covered calls, with just the click of a few buttons, we welcome you to watch this quick demonstration video:
Tap Here to See the Tools at Work

Thanks for reading.

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.

The author has no position in Twitter Inc (NYSE:TWTR) as of this writing.

Go to the back-test link

Yes, it is just what is shown (for TWTR).

But, as I replace TWTR with other stocks, almost every single one that I test, shows even better results.

Everything is 75%-87.5% wins, but, depending on the stock and lookback period, the returns seem to rise into triple digits with each new test.

I'm just wondering why you chose to focus on TWTR to write a story about, when there are so many others that are WAY better in every regard?

Ophir Gottlieb · June 20, 2017

6 minutes ago, cuegis said:

Yes, it is just what is shown (for TWTR).

But, as I replace TWTR with other stocks, almost every single one that I test, shows even better results.

Everything is 75%-87.5% wins, but, depending on the stock and lookback period, the returns seem to rise into triple digits with each new test.

I'm just wondering why you chose to focus on TWTR to write a story about, when there are so many others that are WAY better in every regard?

Showing a stock that has gone up for 3-years working on a short put spread is easy -- it's a real strategy when it works for stocks that have collapsed.

I'm not looking for good bc up is up -- I'm looking for a win, irrespective of broad stock direction. Show me a collapsing stock that has a period where a short p/s works -- OK, now you have my attention.

cuegis · June 20, 2017

20 minutes ago, Ophir Gottlieb said:

Showing a stock that has gone up for 3-years working on a short put spread is easy -- it's a real strategy when it works for stocks that have collapsed.

I'm not looking for good bc up is up -- I'm looking for a win, irrespective of broad stock direction. Show me a collapsing stock that has a period where a short p/s works -- OK, now you have my attention.

Well, it hasn't gone down the past 2 of those 3 years. It has just been in a trading range for 2 years.

The collapse happened before 2 years ago.

Guy · June 20, 2017

On 6/18/2017 at 0:02 PM, Darcy MacDonald said:

So I've been experimenting with butterflies on RUT (balanced ones, not broken wing). I cam up with this using puts:

http://tm.cmlviz.com/index.php?share_key=DsmflSzQHWR3pWFX

The results are fantastic, but after digging into it, I realized that the strikes are unbalanced. I think the backtesting is picking strikes based on the closest delta, which may not always be balanced. I'm guessing that when they're unbalanced, the margin requirement goes up, which skews the percentage gains calc?

Darcy -- my read on this is that the risk analysis is incorrect. Absolute profits may be fine, but to say that in 58 trades on the RUT, you only risked around $1200 is way wrong. Just one ATM RUT butterfly, 30 days out, with 45 point wide strikes risks about a $1600 loss...though the BP reduction is about $12.50 with portfolio margin. Maybe Ophir can check and see how risk is calculated on butterflies. If risk is buying power reduction, I think the risk analysis in the Trade Machine might be a little goofy! Your trade is probably still good, just not as good as stated as risked reduction. Hope that makes sense.

Edited June 20, 2017 by Guy

Ophir Gottlieb · June 20, 2017

1 hour ago, cuegis said:

Well, it hasn't gone down the past 2 of those 3 years. It has just been in a trading range for 2 years.

The collapse happened before 2 years ago.

I mean, this is a two-year stock chart (down 55%).

Yowster · June 20, 2017

1 hour ago, Guy said:

Darcy -- my read on this is that the risk analysis is incorrect. Absolute profits may be fine, but to say that in 58 trades on the RUT, you only risked around $1200 is way wrong. Just one ATM RUT butterfly, 30 days out, with 45 point wide strikes risks about a $1600 loss...though the BP reduction is about $12.50 with portfolio margin. Maybe Ophir can check and see how risk is calculated on butterflies. If risk is buying power reduction, I think the risk analysis in the Trade Machine might be a little goofy! Your trade is probably still good, just not as good as stated as risked reduction. Hope that makes sense.

@Guy @Darcy MacDonaldI agree with Guy, the risk calculation is way off so the trade is not quite as profitable as it seems. I believe the "risked" amount is meant to be the highest amount at risk in any trade iteration, but that is not the case. I looked at the detailed trade stats, and lets take the very first trade in Darcy's example http://tm.cmlviz.com/index.php?share_key=DsmflSzQHWR3pWFX.

Its an 1120/1185/1230 unbalanced put fly purchased for $1020 (another way to think of it is breaking the trade into 2 vertical spreads so you have a credit spread of width 65 and a debit spread of width 45). With a regular balanced fly the max you can lose is the amount you paid when opening the trade. With this unbalanced fly, if RUT is above the high 1230 strike at expiration you only lose the $1020 you paid, but if it is below the low 1120 strike you would have to pay an additional $2000 when closing the trade (because the credit spread is 20 points wider than the debit spread). So, in this example the max loss (the risked amount) is the $3020 - the $1020 trade cost plus the additional $2000 if RUT goes below the short strike. In the trade summary it even shows the avg loss of $1356 - which is greater than the amount risked value of $1199 so this can't possibly be correct.

@Ophir GottliebTake a look at the above, something is wrong with the risked calculation for this custom trade...

Edited June 20, 2017 by Yowster

Ophir Gottlieb · June 20, 2017

7 minutes ago, Yowster said:

@Guy @Darcy MacDonaldI agree with Guy, the risk calculation is way off so the trade is not quite as profitable as it seems. I believe the "risked" amount is meant to be the highest amount at risk in any trade iteration, but that is not the case. I looked at the detailed trade stats, and lets take the very first trade in Darcy's example http://tm.cmlviz.com/index.php?share_key=DsmflSzQHWR3pWFX.

Its an 1120/1185/1230 unbalanced put fly purchased for $1020 (another way to think of it is breaking the trade into 2 vertical spreads so you have a credit spread of width 65 and a debit spread of width 45). With a regular balanced fly the max you can lose is the amount you paid when opening the trade. With this unbalanced fly, if RUT is above the high 1230 strike at expiration you only lose the $1020 you paid, but if it is below the low 1120 strike you would have to pay an additional $2000 when closing the trade (because the credit spread is 20 points wider than the debit spread). So, in this example the max loss (the risked amount) is the $3020 - the $1020 trade cost plus the additional $2000 if RUT goes below the short strike. In the trade summary it even shows the avg loss of $1356 - which is greater than the amount risked value of $1199 so this can't possibly be correct.

@Ophir GottliebTake a look at the above, something is wrong with the risked calculation for this custom trade...

We are still working on risk for odd situations (like this). We're getting there, making nice progress every day. Thanks for all your feedback!.

Guy · June 20, 2017

12 hours ago, Ophir Gottlieb said:

Showing a stock that has gone up for 3-years working on a short put spread is easy -- it's a real strategy when it works for stocks that have collapsed.

I'm not looking for good bc up is up -- I'm looking for a win, irrespective of broad stock direction. Show me a collapsing stock that has a period where a short p/s works -- OK, now you have my attention.

Ophir -- Just one perspective...but I too look for trades that can be frequent and irrespective of market direction. I want strategies that I can run weekly, or at a minimum monthly, and work well in all market environments. With Trade Machine, I found a set of weekly strangle sales in some of the major ETF's that seem to do that, and posted that previously (to the sound of crickets!). I think I would personally find it difficult to manage trades that occur only 4 times a year or less. (But I count on Kim to do that with SO trades!) Also, I am more likely to believe in a strategy that has proven successful with a large number of occurrences (like 25+) than one that has less than 10 -- and can be influenced by an outlier.

So, keep up the great work on Trade Machine and CMLviz. TM has advanced my own trading more than anything I have run across in the last 5+ years, and at significantly less cost than some of the guru courses I have unfortunately spent a small fortune on!!!

Ophir Gottlieb · June 20, 2017

36 minutes ago, Guy said:

Ophir -- Just one perspective...but I too look for trades that can be frequent and irrespective of market direction. I want strategies that I can run weekly, or at a minimum monthly, and work well in all market environments. With Trade Machine, I found a set of weekly strangle sales in some of the major ETF's that seem to do that, and posted that previously (to the sound of crickets!). I think I would personally find it difficult to manage trades that occur only 4 times a year or less. (But I count on Kim to do that with SO trades!) Also, I am more likely to believe in a strategy that has proven successful with a large number of occurrences (like 25+) than one that has less than 10 -- and can be influenced by an outlier.

So, keep up the great work on Trade Machine and CMLviz. TM has advanced my own trading more than anything I have run across in the last 5+ years, and at significantly less cost than some of the guru courses I have unfortunately spent a small fortune on!!!

Thank you so much, Guy. I'm very happy to hear it.

cuegis · June 20, 2017

I believe I have found a bug in a backtest of a short Iron Condor (it is really known as an "Iron Butterfly").

This is where you sell the ATM straddle and buy the 20 Delta Strangle.

It would be an Iron "Condor" if it consisted of 2 strangles.

But, back to the point.

As you can see by looking back at the actual trades.

Only look back at the 2nd box, which says "sell 50 Delta Call and Put

Buy 20 Delta Call and Put."

Open up the box to view the actual trades.

As far as I can see, you are selling 50 Delta Calls and 80 Delta Puts, and buying 20 Delta "Strangles".

Why does it continue to sell 80 Delta puts and 50 Delta calls, while saying that it is selling 50 delta of each?

It can't be because of where the price is and not being able to find the appropriate strike.

If there is a 46 call, then there has to be a 46 put.

http://tm.cmlviz.com/index.php?share_key=ZEpJQHDUN2QSw1wI

NikTam · June 21, 2017

@Ophir Gottlieb Just looking at this more seriously and running some hypotheticals. AMZN-Never Trade Earnings -Long Call Verticals -10 days from expiration: with Long 60 Deltas and short 30 Deltas appear to do very well. I like the short time frame as it allows more turnovers. This tests well in 6 Mo,1 Yr,2 Yr scenarios. 3 Yr not bad either. I like the liquidity of a big mover like AMZN. Right now I'm in a long call vertical but it's long 55 Delta and short 15 Delta. I may make a change tomorrow.....http://tm.cmlviz.com/index.php?share_key=hXyHedCQLgbhAtH5

Edited June 21, 2017 by NikTam

Ophir Gottlieb · June 21, 2017

3 hours ago, cuegis said:

I believe I have found a bug in a backtest of a short Iron Condor (it is really known as an "Iron Butterfly").

This is where you sell the ATM straddle and buy the 20 Delta Strangle.

It would be an Iron "Condor" if it consisted of 2 strangles.

But, back to the point.

As you can see by looking back at the actual trades.

Only look back at the 2nd box, which says "sell 50 Delta Call and Put

Buy 20 Delta Call and Put."

Open up the box to view the actual trades.

As far as I can see, you are selling 50 Delta Calls and 80 Delta Puts, and buying 20 Delta "Strangles".

Why does it continue to sell 80 Delta puts and 50 Delta calls, while saying that it is selling 50 delta of each?

It can't be because of where the price is and not being able to find the appropriate strike.

If there is a 46 call, then there has to be a 46 put.

http://tm.cmlviz.com/index.php?share_key=ZEpJQHDUN2QSw1wI

Let's keep support questions to our support staff (support@cmlviz.com).

You'll get faster answers than waiting for me to check this board. Happy to help there if it requires my attention as well.

Ophir Gottlieb · June 21, 2017

26 minutes ago, NikTam said:

@Ophir Gottlieb Just looking at this more seriously and running some hypotheticals. AMZN-Never Trade Earnings -Long Call Verticals -10 days from expiration: with Long 60 Deltas and short 30 Deltas appear to do very well. I like the short time frame as it allows more turnovers. This tests well in 6 Mo,1 Yr,2 Yr scenarios. 3 Yr not bad either. I like the liquidity of a big mover like AMZN. Right now I'm in a long call vertical but it's long 55 Delta and short 15 Delta. I may make a change tomorrow.....http://tm.cmlviz.com/index.php?share_key=hXyHedCQLgbhAtH5

I like this, but just note that it is, without question, a bullish stance, unlike some of the other ideas we discuss here which tend to be less stock direction biased.

Having said that, one of my favorite approaches is to look at trades that win a lot, and try them until they lose, then I simply move on. I know my last trade will be a loss, that's my trigger to move on, but until then I can try some momentum. I just don't let myself dig a hole by trying over and over again with a loser that is stock direction biased.

NikTam · June 21, 2017

@Ophir Gottlieb thanks for response! Is it possible to structure a butterfly or even unbalanced butterfly? I couldn't figure out how to do it using Custom option.

Ophir Gottlieb · June 21, 2017

2 hours ago, NikTam said:

@Ophir Gottlieb thanks for response! Is it possible to structure a butterfly or even unbalanced butterfly? I couldn't figure out how to do it using Custom option.

Sure. Here is an ATM butterfly: http://tm.cmlviz.com/index.php?share_key=TwIYaGU9I8ejF6yo

This is AMZN over the last 3-years

Edited June 21, 2017 by Ophir Gottlieb

Ophir Gottlieb · June 21, 2017

Timing Red Hat Options Around Earnings

Date Published: 2017-06-21
Written by Ophir Gottlieb

LEDE
Red Hat Inc (NYSE:RHT) just beat earnings and the stock is ripping to new all-time highs, but the real opportunity with options wasn't earnings -- it's right after earnings.

The Trade After Earnings
Selling a put spread every month in a stock that is rising, in hindsight, obviously looks like a great idea. But, there is a lot of risk in that trade, namely, the risk of an abrupt stock drop and a market sell-off that takes all stocks with it. So, we want to reduce the risk while not affecting the returns.

One of our go to trade set-ups starts by asking the question if trading every month is worth it -- is it profitable -- is it worth the risk? There's an action plan that measures this exactly, and the results are powerful not just for Red Hat Inc, but for Apple Inc (NASDAQ:AAPL), Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOGL) as well.

Let's test the idea of selling a put spread only in the month after earnings. Here's what we mean:

Our idea here is that after earnings are reported, and after the stock does all of its gymnastics, up or down, that two-days following the earnings move and for the next month, the stock is then in a quiet period.

If it gapped down -- that gap is over. If it beat earnings, the downside move is already likely muted. Here is the set-up:

More explicitly, the rules are:

Rules
* Open short put spread 2-days after earnings.
* Close short put spread 29-days later.
* Use the option that is closest to but greater than 40-days away from expiration.

And here are the results of implementing this much finer strategy:

Tap Here to See the Actual Back-test

We see a 29.4% winner that only traded the month following earnings and took no risk at all other times. The trade has won 7 of the last 8 times, or a 87.5% win-rate.

Here is how the strategy has done over the last year:

Back-test Link

It turns out the return is really coming from a streak of wins in the last year. We see a 47.5% return, winning each of the last four earning cycles. That 47.5% return is based on just 4-months of trading, so it's more than 160% in annualized returns.

Here's what we see over the last six-months:

Back-test Link

Now we see a 28.9% return over the last two earnings cycles, winning both times.

As an aside, this logic of finding the month of lowest risk to sell put spreads also worked remarkably well and remarkably similarly across the board in Apple Inc, Facebook Inc and Alphabet Inc.

Back-test Link

WHAT HAPPENED
This is it. This is just one of the ways people profit from the option market -- optimize returns and reduce risk. To see how to do this for any stock and for any strategy, including covered calls, with just the click of a few buttons, we welcome you to watch this quick demonstration video:
Tap Here to See the Tools at Work

Thanks for reading.

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.

The author has no position in Red Hat Inc as of this writing.

Back-test Link

Yowster · June 21, 2017

@Ophir GottliebThe "Risked" value is way too high for your RHT example. Take a look at your 1-year backtest, it has the amount risked as $2905 for selling 5 put vertical credit spreads. Now, when you look into the trade details, the maximum width of the four credit spreads is 5. So, 500x5=2500 (which is less than the 2905 value displayed by the tool) - but you also have to subtract the credit received 73x5=365 which gives you a Risk value of 2500-365=2135. This is the first trade iteration in the 1-year backtest, the other three trades have risk values that are even lower.

Edited June 21, 2017 by Yowster

cuegis · June 21, 2017

15 hours ago, Ophir Gottlieb said:

Sure. Here is an ATM butterfly: http://tm.cmlviz.com/index.php?share_key=TwIYaGU9I8ejF6yo

This is AMZN over the last 3-years

You can also create the exact same trade using puts and calls (Iron Butterfly).

You are selling the ATM straddle, and buying whatever delta (ex. 20, 30 etc) strangle you want

You don't need to make it from a "Custom Trade".

You can easily create it from the basic program by choosing Iron Condor (wrong definition), and sell 50 delta calls and puts, and buy 20, or 30 delta puts and calls.

The program had a bug that was not calculating this trade correctly.

But, I wrote to Support, and the they found the problem and fixed it.

NikTam · June 21, 2017

@cuegis @Ophir Gottlieb excellent. Thank you!

Ophir Gottlieb · June 23, 2017

The Unbelievable Pattern in Alphabet Stock Ahead of Earnings

Date Published: 2017-06-23
Written by Ophir Gottlieb

Lede
There is an unbelievable pattern in Alphabet Inc (NASDAQ:GOOGL) stock ahead of earnings that has meant a wonderful return in the option market.

Preface
One of the least recognized yet most important phenomena surrounding this market run by the mega technology stocks is the amount of optimism that sets in the two weeks before an earnings announcement.

That is, totally irrespective of whether the stocks have a history of beating earnings, in the two-weeks before of earnings, several of them tend to rally abruptly into the event. There has been a way to profit from this pattern without taking any actual earnings risk -- and it is simply staggering in Alphabet Inc (NASDAQ:GOOGL).

This is how people profit from the option market -- it's attention to detail rather than hope.

The Trade Before Earnings
Let's look at a simple idea -- buying a monthly call option in Alphabet Inc two-weeks before earnings 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 result of the earnings result.

Now, unlike many of our other set-ups, this is in fact a straight down the middle bullish bet -- this absolutely takes on directional stock risk, so let's be conscious of that before we see the results, because they are mind bending.

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

Go to the back-test link

I know it seems absurd, but the trade has won 7 of the last 8 earnings pre-earnings cycles, for a 895% return.

We can look at the last year as well:

Go to the back-test link

We're now looking at 377% returns on 4 winning trades and 0 losing trades. It's worth noting again that we are only talking about two-weeks of trading for each earnings release, so this 377% in just 8-weeks of total trading.

For completeness, we include the results over the two most recent earnings events (6-months).

Go to the back-test link

That's 209% on 4-weeks of trading without once taking the risk of an actual earnings release.

THE STOCK CHART
We can look at Alphabet Inc's stock chart to see what's happening -- that is, to see the optimism (The blue "E" icons represent earnings). Note that the yellow arrows show the stock rise ahead of earnings, and we even box the times that the post earnings move was poor:

What is so fascinating about this chart is that the stock does not necessarily follow through after earnings. We have boxed the times when GOOGL stock actually tanked after earnings -- but it has not upset the pattern of optimism for the next pre-earnings move.

If you're wondering if this works for other mega tech names, the answer is yes. We will cover those for subscribers only in the coming days and combining them, that is, taking a position in more than one, alleviates the risk of a "coin flip" miss. That's the approach we want to take.

Even further, all of the results we looked at were using a 50% stop loss -- that means if the calls that were purchased ever saw losses, we just closed the potion out and moved on.

WHAT HAPPENED
This is how people profit from the option market -- it's preparation, not luck. It's attention to detail rather than hope. To see how to do this for any stock and for any strategy, including covered calls, with just the click of a few buttons, we welcome you to watch this quick demonstration video:
Tap Here to See the Tools at Work

Thanks for reading.

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.

The author has no position in Alphabet Inc (NASDAQ:GOOGL) as of this writing.

Go to the back-test link

Edited June 24, 2017 by Ophir Gottlieb
mistaken image

Ophir Gottlieb · June 26, 2017

The Pattern in Facebook Stock Ahead of Earnings

Date Published: 2017-06-26
Written by Ophir Gottlieb

Lede
This is a continuation of our discussion on Alphabet Inc (NASDAQ:GOOGL).

There is a powerful pattern in Facebook Inc (NASDAQ:FB) stock ahead of earnings that has meant a wonderful return in the option market. The strategy won't work forever, but for now it appears to be a momentum play.

Preface
As we discussed with Alphabet Inc, one of the least recognized yet most important phenomena surrounding this market run by the mega technology stocks is the amount of optimism that sets in the two weeks before an earnings announcement.

That is, totally irrespective of whether the stocks have a history of beating earnings, in the two-weeks before of earnings, several of them tend to rally abruptly into the event. There has been a way to profit from this pattern without taking any actual earnings risk -- and it is very powerful in Facebook Inc (NASDAQ:FB).

The Trade Before Earnings
Let's look at buying a monthly call option in Facebook Inc two-weeks before earnings 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 result of the earnings result.

Now, unlike many of our other set-ups, this is in fact a straight down the middle bullish bet -- this absolutely takes on directional stock risk, so let's be conscious of that before we see the results, because they are mind bending.

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

Go to the back-test link

The trade has won 6 of the last 8 earnings pre-earnings cycles -- so this isn't some silver bullet (6 wins, 2 losses). But, the trade has won 75% of the time, and the return has been a staggering 670%.

The fascinating part here is that each winning trade averaged more twice as much as the losing trades, or in English, this trades wins 3 times more often it loses and the wins are twice as large as the losses, and that's how you find a trade with a 670% return.

Note on Risk Reduction
As a point of note, when we run this back-test using a limit gain of 30%, or in English, we close the position if it is ever up 30%, we avoid one of the losses, and this turns into a strategy that has won 7 of the last 8 earnings cycles:

Go to the back-test link

We note here that the Alphabet Inc (NASDAQ:GOOGL) long call ahead of earnings also won 7 of the last 8 times and the losing quarter for GOOGL was not the same losing quarter for FB, so if these two were used together as a portfolio of pre-earnings calls, the combined strategy would have won all 16 times (eight quarters each).

Checking More Time Periods
Now we can look at just the last year as well (using no stops or limits):

Go to the back-test link

We're now looking at 324% returns on 4 winning trades and 0 losing trades. It's worth noting again that we are only talking about two-weeks of trading for each earnings release, so this 324% in just 8-weeks of total trading.

For completeness, we include the results over the two most recent earnings events (6-months).

Go to the back-test link

That's 294% on 4-weeks of trading without once taking the risk of an actual earnings release.

WHAT HAPPENED
Bull markets have quirks, or personalities if you like. The personality of this bull is mega cap tech heavy and full of optimism before earnings -- irrespective of the actual earnings result.

This is how people profit from the option market -- it's preparation, not luck. To see how to do this for any stock and for any strategy, including covered calls, with just the click of a few buttons, we welcome you to watch this quick demonstration video:
Tap Here to See the Tools at Work

Thanks for reading.

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.

The author has no position in Facebook Inc (NASDAQ:FB) as of this writing.

Go to the back-test link

NikTam · June 26, 2017

@Ophir Gottlieb I did some back-testing on AMZN of a simple vertical call debit spread strategy with only a 6 day duration: Long the ATM 50 delta call and Short the 20 delta. It produces good results in all time frames -- if you avoid earnings. Looking at the Excel spreadsheet it illustrates buying the spread on Friday and holding it until the following Friday (expiration). I could see doing a small position on this every week as part of an overall portfolio trading program. Thoughts?

http://tm.cmlviz.com/index.php?share_key=rTU7NoCUoWmBICn2

Ophir Gottlieb · June 26, 2017

1 minute ago, NikTam said:

@Ophir Gottlieb I did some back-testing on AMZN of a simple vertical call debit spread strategy with only a 6 day duration: Long the ATM 50 delta call and Short the 20 delta. It produces good results in all time frames -- if you avoid earnings. Looking at the Excel spreadsheet it illustrates buying the spread on Friday and holding it until the following Friday (expiration). I could see doing a small position on this every week as part of an overall portfolio trading program. Thoughts?

http://tm.cmlviz.com/index.php?share_key=rTU7NoCUoWmBICn2

So this is going to sound really weird, but it's actually against the rules for me to comment to one person, but I'm allowed to comment to a large group that isn't person specific. So, I can't really say anything other than some broad stokes.

1. Buying a call spread on a stock that goes up is generally a good idea, the question is whether it continues in the future.

2. This is a directional trade (bullish), which is fine, but just be aware that this is not a volatility scalp or timing pattern trade.

3. I generally, not specifically to this, like momentum trades. I have a pretty simple thought process which is that I like repeating a winning trade and I stop when it stops working. So, if I do a momo trade, and this is a momo trade, I know my last trade will be a loser -- that's fine, it's my exit signal. Until then, I may just let it ride until it stops -- why second guess?

4. Momo trades are just part of a broader option portfolio which can also include direction free bets, much like Kim does here extremely well, or minimally directional bets that try to scalp patterns in time (as a TM member you can read all of these on the Discover Tab -- pre and post earnings patterns, that are just vaguely directional).

I hope that was helpful, NT, it's as specific as I feel comfortable with and of course, now important disclaimers are coming:

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.

NikTam · June 26, 2017

@Ophir Gottlieb Ok. I thought we were sharing back-testing ideas. But I suppose this is a directional trade so not really core to the SO forum approach. That's fine.

Darcy MacDonald · June 26, 2017

9 minutes ago, NikTam said:

@Ophir Gottlieb I did some back-testing on AMZN of a simple vertical call debit spread strategy with only a 6 day duration: Long the ATM 50 delta call and Short the 20 delta. It produces good results in all time frames -- if you avoid earnings. Looking at the Excel spreadsheet it illustrates buying the spread on Friday and holding it until the following Friday (expiration). I could see doing a small position on this every week as part of an overall portfolio trading program. Thoughts?

http://tm.cmlviz.com/index.php?share_key=rTU7NoCUoWmBICn2

Well, that's basically just a very highly leveraged long position. Certainly over the last 3 years that was a winning proposition. Take another stock that tanked in that same timeframe though, and the leverage cuts the other way:

http://tm.cmlviz.com/index.php?share_key=PsVOrdTRi1SORW9u

Making a trade like this indicates you are extremely bullish on AMZN go forward.

Instead of doing the trade because it worked in the past, I think you need to do it because you believe it will work in the future. I am personally pretty optimistic about AMZN's performance, but not to the extent that I'd take a bet like that.

NikTam · June 26, 2017

@Darcy MacDonald It's leveraged only because it's an option -- it's actually a hedged trade given the premium collected on the short leg (and the cap on profitability). Yes, I am long-term bullish AMZN. I see no reason not to be. Systemic risk could be a factor -- but nothing indicating a general recession is apparent to me. Position size is the critical decision in my view.

SBatch · June 26, 2017

28 minutes ago, Darcy MacDonald said:

Well, that's basically just a very highly leveraged long position. Certainly over the last 3 years that was a winning proposition. Take another stock that tanked in that same timeframe though, and the leverage cuts the other way:

http://tm.cmlviz.com/index.php?share_key=PsVOrdTRi1SORW9u

Making a trade like this indicates you are extremely bullish on AMZN go forward.

Instead of doing the trade because it worked in the past, I think you need to do it because you believe it will work in the future. I am personally pretty optimistic about AMZN's performance, but not to the extent that I'd take a bet like that.

How is a 50/20 Delta call debit spread a "very highly leveraged long position"?

Edited June 26, 2017 by SBatch

Darcy MacDonald · June 26, 2017

24 minutes ago, SBatch said:

How is a 50/20 Delta call debit spread a "very highly leveraged long position"?

I just mean that it's comparable to buying the stock but with the extra leverage afforded by the option position.

The trade depends entirely on a directional bet for the stock itself, so I think that's where the analysis lies, not as much the options position.

SBatch · June 26, 2017

Just now, Darcy MacDonald said:

I just mean that it's comparable to buying the stock but with the extra leverage afforded by the option position.

The trade depends entirely on a directional bet for the stock itself, so I think that's where the analysis lies, not as much the options position.

It is simply a directional option spread, this does not make it leveraged. By definition a leveraged position is one that can lose more than the initial amount invested, which is clearly not possible here. We only trade options with this service so I am confused by the comparison to owning the underlying. Directional or not that comparison of options vs. the underlying could be made with regard to all of our trades.

cuegis · June 26, 2017

1 Word....."DELTA"

Darcy MacDonald · June 26, 2017

12 minutes ago, SBatch said:

By definition a leveraged position is one that can lose more than the initial amount invested, which is clearly not possible here.

Right, but the other aspect of leverage is the fact that the gains or losses are magnified in comparison to the movement of the underlying. Your position will move more than the stock, but in the same direction, that's all.

I'm comparing it to buying the stock only because I think the rationale for the trade is the same. There must be some reason for believing AMZN will go up in the next 6 days or you wouldn't take this one.

SBatch · June 26, 2017

Just now, Darcy MacDonald said:

Right, but the other aspect of leverage is the fact that the gains or losses are magnified in comparison to the movement of the underlying. Your position will move more than the stock, but in the same direction, that's all.

I'm comparing it to buying the stock only because I think the rationale for the trade is the same. There must be some reason for believing AMZN will go up in the next 6 days or you wouldn't take this one.

I agree with this statement but that just makes it directional not leveraged.

NikTam · June 26, 2017

@cuegis by which I think you mean that given the bullish conviction the larger delta of the long position versus the smaller delta of the short position will maintain a profitable net value.

cuegis · June 27, 2017

15 hours ago, NikTam said:

@cuegis by which I think you mean that given the bullish conviction the larger delta of the long position versus the smaller delta of the short position will maintain a profitable net value.

Yes. All he is doing is, for whatever reason, deciding that a stock is going to go up (or down).

After that , it really is no longer an "options" trade.

You are just using options as a proxy for the stock.

If you just buy 10 .50 delta calls,then you bought 500 shares of stock.

If you bought 10 50 delta calls,and sold 10 20 delta calls, then you bought 300 shares of the stock.

It is a delta trade ONLY.

I wouldn't use Trade Machine during the times that I am doing my research for a strictly directional trade.

I would look at a chart.

The only time that the use of options becomes an advantage in a purely directional play is when you can sell other options to mostly neutralize as much time decay as possible.

Personally, for a strictly directional trade, I would most use verticals for that reason.

Because now you can get rid of all the other greeks from the picture, and keep it strictly a (Delta) directional trade, that is minimally effected by time decay or IV changes.

I have made money more consistently with delta neutral trades.

By , by a huge difference, I have made more "money" from successful directional trades. Like GILD this past 2 weeks.

You just have to weigh the greater risks that come with directional trading, and allocate much less money to them.

Because, even though the best ones can make 800%+++, the losers are in proportion to that.

Edited June 27, 2017 by cuegis

Ophir Gottlieb · June 28, 2017

How to Trade Options Before Earnings in Fabrinet (NYSE:FN)

Date Published: 2017-06-28

This article can be seen in a video or as a full written article below the video.

PREFACE
Trading options in Fabrinet (NYSE:FN) using a short window before earnings are released has been a staggering winner over the last several years.

This is it -- this is how people profit from the option market. Identifying strategies that are tightly risk controlled, take no stock direction risk and no earnings risk. Strategies that are immune from a bull or bear market.

STORY
Everyone knows that the day of an earnings announcement is a risky event for a stock. But the question every option trader, whether professional or amateur, has long asked is if there is a way to profit from this known implied volatility rise. It turns out, that over the long-run, for stocks with certain tendencies, the answer is actually, yes.

Yes, there is a systematic way to trade this repeating phenomenon, without making a bet on earnings or stock direction.

THE SET UP
What a trader wants to do is to see the results of buying an at the money straddle a couple of weeks before earnings, and then sell that straddle just before earnings. Here is the setup:

We are testing opening the position 14 days before earnings and then closing the position 1 day before earnings. This is not making any earnings bet. This is not making any stock direction bet.

Once we apply that simple rule to our back-test, we run it on an at-the-money straddle:

RETURNS
If we did this long at-the-money straddle in Fabrinet (NYSE:FN) over the last three-years but only held it before earnings we get these results: