Thor Industries Inc (NYSE:THO) : The One-Week Pre-earnings Momentum Trade With OptionsDate Published: 2017-09-6
There is a bullish momentum pattern in Thor Industries Inc (NYSE:THO) stock 7 calendar days before earnings, and we can capture that phenomenon explicitly by looking at returns in the option market.
Thor Industries, Inc. manufactures a range of recreational vehicles (RVs) in the United States and sells those vehicles primarily in the United States and Canada. Here is a stock return chart over the last two-years, with the blue "E" icons representing earnings dates.
We can see the pattern breaking down in the June 2016 pre-earnings run, but working well in the other seven of the last eight pre- earnings cycles.
We found this back-test by using the Pro Scanner and searching for all tickers and the 7-day pre-earnings long call scan:
Then we sorted by earnings date, and found THO had won all four of the last pre-earnings periods:
Our earnings date provider is Wall Street Horizon, and they have a estimate for earnings in late September -- this is not a confirmed date.
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 Thor Industries Inc.
The Bullish Option Trade Before Earnings in Thor Industries Inc
We will examine the outcome of getting long a 50 delta monthly call option in Thor Industries Inc 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.
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:
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.
Here are the results over the last two-years in Thor Industries Inc:
We see a 331% return, testing this over the last 8 pre-earnings periods in Thor Industries Inc. That's a total of just 56 days (7-days for each earnings date, over 8 earnings dates). This has been the results of following the trend of bullish sentiment into earnings while avoiding the actual earnings result.
While this strategy had an overall return of 331%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 27.9%.
➡ The average percent return per winning trade was 33.8%.
➡ The percent return for the one losing trade was -13%.
Back-testing More Time Periods in Thor Industries Inc
Now we can look at just the last year as well:
We're now looking at 108% 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.
➡ The average percent return over the last year per trade was 29.4%.
Bull markets tend to create optimism, whether it's deserved or not. This has been a tradable phenomenon in Oracle Corporation. To see how to test this for any stock we welcome you to watch this quick demonstration video:
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You should read the Characteristics and Risks of Standardized Options.
Past performance is not an indication of future results.
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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.