Trading Earnings Optimism in Micron Technology Inc
Micron Technology Inc (NASDAQ:MU) : Trading Earnings Optimism
Date Published: 2018-06-01Disclaimer
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 powerful pattern of optimism and momentum in Micron Technology Inc (NASDAQ:MU) stock right before of earnings that has won for 8 consecutive quarters, and we can capture that pattern by looking at returns in the option market.
According to our data provider, Wall Street Horizon, Micron has earnings due out on 6-20-2018, after the market closes. 14-days before then would be June 6th near the market close.
CONTEXT
Before we get to the back-test there is some relevant context. Micron pre-announced aggressively raised earnings guidance recently and it sent the stock higher. Then, Morgan Stanley downgraded the stock on valuation concerns following a big run-up.
Here is a 3-month stock chart that illustrates the push and pull.
We bring tis up because there is now exogenous events that may impact this momentum one way or the other that a back-test may not fully capture. The Options Optimism Trade Before Earnings in Micron Technology Inc
Let's look at the results of buying a three-week out of the money call (40 delta) call option in Micron Technology Inc 14-days before earnings (using calendar days) and selling the call before the earnings announcement.
Here's the set-up in great clarity; again, note since MU reports after the bell, that the trade closes before earnings, so this trade does not make a bet on the earnings result.
Now, unlike many of our other set-ups, this is in fact a straight down the middle bullish bet -- this absolutely takes on directional stock risk, so let's be conscious of that before we see the results, because they are mind bending.
Here are the results over the last two-years in Micron Technology Inc:
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 `MU` 14 days before earnings
We see a 1434% return, testing this over the last 8 earnings dates in Micron Technology Inc.
Setting Expectations
While this strategy had an overall return of 1434%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 71% per 15-day period.
Checking More Time Periods in Micron Technology Inc
Now we can look at just the last year as well:
We're now looking at 464% returns, on 4 winning trades and 0 losing trades.
➡ The average percent return over the last year per trade was 78.2% per 15-day period.
WHAT HAPPENED
There's a lot less luck to successful option trading than most people realize and this is it.
To learn more about empirical option trading we welcome you to watch this quick demonstration video:
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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.