Right Now: Trading the After Earnings Pattern in Advanced Micro Devices Inc
Advanced Micro Devices Inc (NASDAQ:AMD) :Trading the After Earnings Pattern
Date Published: 2018-04-25Disclaimer
The results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.
LEDE
AMD reported earnings on 4-25-2018 after the market closed. There has been a powerful pattern right after earnings that bets on volatility for a period that starts one-day after earnings and lasts for the 6 calendar days to follow, that has been a winner for the last 2 years and takes no stock direction risk at all. We note the use of strict risk controls in this analysis.
Advanced Micro Devices Inc (NASDAQ:AMD) Earnings
In Advanced Micro Devices Inc, irrespective of whether the earnings move was large or small, a back-test that waited one-day after earnings and then bought an one-week straddle (using two-week options), the results were quite strong. This trade opens one-day after earnings were announced to try to find a stock that moves a lot after the earnings announcement.
Simply owning options after earnings, blindly, is likely not a good trade, but hand-picking the times and the stocks to do it in can be useful. We can test this approach without bias with a custom option back-test. Here is the timing set-up around earnings:
Rules
* Open the long at-the-money straddle one-calendar day after earnings.
* Close the straddle 7 calendar days after earnings.
* Use the options closest to 14 days from expiration (but more than 7 days).
This is a straight down the middle volatility bet -- this trade wins if the stock is volatile the week following earnings and it will stand to lose if the stock is not volatile. This is not a silver bullet -- it's a trade that needs to be carefully examined.
But, this is a stock direction neutral strategy, which is to say, it wins if the stock moves up or down -- it just has to move.
RISK CONTROL
Since blindly owning volatility can be a quick way to lose in the option market, we will apply a tight risk control to this analysis as well. We will add a 40% stop loss and a 40% limit gain.
In English, at the close of every trading day, if the straddle is up 40% from the price at the start of the trade, it gets sold for a profit. If it is down 40%, it gets sold for a loss. This also has the benefit of taking profits if there is volatility early in the week rather than waiting to close 7-days later.
Another risk reducing move we made was to use 14-day options and only hold them for 7-days so the trade doesn't suffer from total premium decay. This trade closes after 7-days, if the stops or limits didn't trigger a close earlier. It does not wait until expiration of the options.
RESULTS
If we bought the at-the-money straddle in Advanced Micro Devices Inc (NASDAQ:AMD) over the last two-years but only held it after earnings we get these results:
| AMD Long At-the-Money Straddle |
|||
| % Wins: | 85.7% | ||
| Wins: 6 | Losses: 1 | ||
| % Return: | 317% | ||
Tap Here to See the Back-test
The mechanics of the TradeMachine™ are that it uses end of day prices for every back-test entry and exit (every trigger).
Track this trade idea. Get alerted for ticker `AMD` 1 days after earnings
We see a 317% return, testing this over the last 7 earnings dates in Advanced Micro Devices Inc. That's a total of just 42 days (6 days for each earnings date, over 7 earnings dates).
Looking at Averages
The overall return was 317%; but the trade statistics tell us more with average trade results:
➡ The average return per trade was 35.1% over 6-days.
➡ The average return per winning trade was 45.8% over 6-days.
➡ The average return for the losing trade was -28.7% over 6-days.
WHAT HAPPENED
We don't always have to look at bullish back-tests in a bull market -- sometimes a straight down the middle volatility pattern pops up. This is it -- this is how people profit from the option market -- finding trading opportunities that avoid earnings risk and work equally well during a bull or bear market.
To see how to do this for any stock 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.
Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.