Applying The New Standard of Repeating Momentum in Palo Alto Networks Inc
Palo Alto Networks Inc (NYSE:PANW): Applying The New Standard
Date Published: 2018-04-27Disclaimer
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.
PREFACE
We have empirically and explicitly demonstrated the the repeating pattern of bullish momentum right before earnings -- during both a bull market and a bear market. But, that research has been furthered by looking at a stock's reaction to the prior earnings release and how it affects the next pre-earnings momentum, one week ahead of earnings.
Most recently we see circumstantial evidence of this double pattern in Under Armour (UA), which has just realized abrupt pre-earnings momentum following last quarter's big earnings beat.
In Palo Alto Networks Inc (NYSE:PANW) we find exactly the two-tiered pattern we researched again -- stocks that have pre-earnings momentum, and ones with a recent history of large beats that push this momentum into the next quarter.
Here is the stock chart over the last 5 earnings releases -- note that tumble five quarters ago, and now the repeating pattern of large stock moves and then the upward stock trajectory in the one-week before the next quarter.
The Bullish Option Trade Before Earnings in Palo Alto Networks Inc
We will examine the outcome of getting long a weekly call option in Palo Alto Networks Inc 6-days(using calendar days) and selling the call before the earnings announcement. Since PANW reports after the market closes, this test looks at holding the call right until the end of that trading day, and then selling before the 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.
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:
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 one-year in Palo Alto Networks Inc:
| PANW: Long 40 Delta Call | |||
| % Wins: | 100% | ||
| Wins: 4 | Losses: 0 | ||
| % Return: | 175% | ||
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 `PANW` 6 days before earnings
We see a 175% return, testing this over the last 4 earnings dates in Palo Alto Networks Inc.
Setting Expectations
While this strategy had an overall return of 175%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 39% over each six-day period.
Is This Just Because Of a Bull Market?
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."
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.
* Yes, you are better than the rest now that you know this.
* Yes, you are powerful for it.
WHAT HAPPENED
Bull markets tend to create optimism, whether it's deserved or not. To see how to find the best performing historical momentum, technical analysis or non-directional trades for any stock using empirical results rather than guesses, 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.
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.