The Two-Week Post-earnings Pattern in Arista Networks Inc
Arista Networks Inc (NYSE:ANET) : The Two-Week Post-earnings Pattern
Date Published: 2018-05-05Disclaimer
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
There has been a repeating momentum pattern in Arista Networks Inc (NYSE:ANET) stock 5 calendar days after earnings, and we can capture that phenomenon explicitly by looking at returns in the option market.
This is an interesting pattern that has grown more abruptly in the last year, though in the last 2-years it has also shown remarkable results. This is also a pattern which just proved successful one quarter ago on an earnings dive, much like we just saw in Arista in 5-3-2018.
The two stock drops had something in common -- while Wall Street didn't like the earnings results, both times, the company beat on EPS and revenue estimates.
Here is an one-year chart of Arista with the earnings denoted by a green "E" icon (from www.CMLviz.com). You can add earnings dates onto the chart by customizing your settings:
And now the actual chart:
We can see earnings pops a drops, but, if we look more carefully, giving the stock some room after earnings, specifically 5 calendar days after earnings, and then looked 21 calendar days after earnings, there was been a large, repeating pattern of a rally -- irrespective of the stock move right after the actual earnings event.
5-calendar days after the most recent Arista earnings report would be 5-8-2018, near the market close.
The Bullish Option Trade Before Earnings in Arista Networks Inc
We will examine the outcome of getting long a call option that is closest to 30-days from expiration (but more than 21-days) in Arista Networks Inc 5-days after earnings (using calendar days) and selling the call 21-days after 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.
RESULTS
Here are the results over the last two-years in Arista Networks Inc:
| ANET: Long 40 Delta Call | |||
| % Wins: | 87.5% | ||
| Wins: 7 | Losses: 1 | ||
| % Return: | 2305% | ||
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 `ANET` 5 days after earnings
Setting Expectations
While this strategy had an overall return of 2305%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 153.7% over each 16-day period.
➡ The average percent return per winning trade was 184.3% over each 16-day period.
➡ The percent return for the losing trade was -60% over a 16-day period.
So make note, when this trade didn't work -- yes, the loss was large. e mitigate some of that loss using a 30-day option and only back-test it for 21-days, so there isn't total time decay. But, make no mistake, this is a bullish back-test -- if the stock doesn't rise, this trade will lose, there is no more magic behind it.
Back-testing More Time Periods in Arista Networks Inc
Now we can look at just the last year as well:
| ANET: Long 40 Delta Call | |||
| % Wins: | 100% | ||
| Wins: 4 | Losses: 0 | ||
| % Return: | 1108% | ||
Tap Here to See the Back-test
We're now looking at 1108% returns.
➡ The average percent return over the last year per trade was 248.2% over each 16-day period.
WHAT HAPPENED
Bull markets tend to create optimism, whether it's deserved or not. For Arista that momentum has existed both before, and after earnings. 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.