Waiting for the Trigger: One-Week Post-earnings Trade in Analog Devices Inc
Analog Devices Inc (NASDAQ:ADI): Waiting for the Trigger
Date Published: 2018-05-23Disclaimer
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 is a bullish momentum pattern in Analog Devices Inc (NASDAQ:ADI) stock that starts 1 calendar day after earnings that has only occurred about once a year, but when it's triggered, it has shown no losses.
ADI has earnings due out on 5-30-2018, before the market opens. One calendar day after that would be 5-31-2018, near the market close.
LOGIC
The logic behind the option trading backtest is easy to understand -- in a bull market there can be a stock after an earnings beat that stretches out for the about a week after the news has been announced.
The Bullish Option Trade After Earnings in Analog Devices Inc
We will examine the outcome of getting long a weekly 50 delta (at the money) call in Analog Devices Inc 1-days before earnings (using calendar days) and selling the call 6-calendar days later, but only if the move off the announced earnings was a large (at least 4%) upward swing
Here's the set-up in great clarity; again, note that the trade opens after 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 30% stop loss and a 30% 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 30% relative to the open price. If it was, the trade was closed.
RESULTS
Here are the results over the last three-years in Analog Devices Inc:
The mechanics of the TradeMachine® Stock Option Backtester 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 `ADI` 1 days after earnings
We see a 105% return, testing this over the last 12 earnings dates in Analog Devices Inc, but it only triggered 4 times in those 3-years.
Setting Expectations
While this strategy had an overall return of 105%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 26.6% in each five-day period.
WHAT HAPPENED
Earnings beats can create optimism for the week to follow, 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.