Date Published: 2017-05-04
Written by Ophir Gottlieb
Correction: A prior publication of this article noted the trade beginning one-day after earnings. That was in error -- this back-test started two-days after earnings.
This is a simple option trade that starts two days after Facebook Inc (NASDAQ:FB) earnings and lasts for one month that has won for three straight years without a loss.
FACEBOOK INC (NASDAQ:FB) EARNINGS
While it's fun to focus on the actual earnings move for a stock, that's the distraction when it comes to the option market. For Facebook Inc, irrespective of whether the earnings move was up or down, if we waited two-days after the stock move, and then sold an out of the money put spread, the results were simply staggering.
We can examine this, objectively, with a custom option back-test. Here is our earnings set-up:
* Open short put spread 2 days after earnings
* Close short put spread 29 days later
* Use the 30-day option
For clarity -- for this cycle, the trade would open on 5-4-2017 at the close of trading.
Here are the results over the last three-years:
That's a 104% return, with 11 winning trades and 0 losing trades. The total holding period was 11 months. No earnings risk was taken -- this is not a coin flip over earnings.
Here's how it did over the last two-years.
That's a 54.6% return, on 7 winning trades and 0 losing trades. Since this is a total of a seven-month holding period, that 54.6% is actually 93.6% annualized.
Finally, we examine the last year:
We see a 34.4% return, on 3 winning trades and 0 losing trades. Since this is just a total of a three-month holding period, that is a 137.6% annualized return. In other words, the trade has continued to work, and the returns are not getting weaker.
This is not a sure thing -- no option trade will "always win." But, there are patterns to stock behaviors before and after earnings and those patterns reveal opportunities in the option market, without taking the actual risk of earnings. You can find them, stock by stock, like Apple and Google before earnings.
This is how people profit from the option market -- it's preparation, not luck.
To see how to do this for any stock and for any strategy with just the click of a few buttons, we welcome you to watch this quick demonstration video:
Tap Here to See the Tools at Work
Thanks for reading.
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.
The author has no position in Facebook Inc (NASDAQ:FB) as of this writing.
Back-test Link (does require custom earnings settings).