Date Published: 2017-05-08
Written by Ophir Gottlieb
One option trade after Twitter Inc (NYSE:TWTR) posts earnings has been a consistent winner and takes no earnings risk and very little stock direction risk.
Twitter Inc Earnings
While most of the focus is on the actual earnings move for a stock, that's the distraction when it comes to the option market. For Twitter 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
Here are the results over the last year:
That's a 41.4% return, with 4 winning trades and 0 losing trades. The total holding period was less than 4 full months, meaning the annualized return was over 120%. No earnings risk was taken -- this is not a coin flip over earnings.
This strategy works beautifully in Facebook, but with Twitter Inc, even naysayers can't criticize this strategy as only working because we're in a bull market. Twitter Inc stock has performed awfully post earnings. Here is a 2-year stock chart, where the earnings dates are designated by a "E" icon and circled in red:
It's the exception, not the rule, when Twitter Inc (NYSE:TWTR) doesn't gap down off of earnings. But the logic behind this trade follows a narrative that even after a bad earnings release, if we wait two days after, we find the stock at a point of equilibrium.
If it gapped down -- that gap is over. If it beat earnings, the downside move is already likely muted. Here's how this strategy has done over the last 6-months:
That's a 11.5% return, on 2 winning trades and 0 losing trades. Since this is a total of a two-month holding period, that 11.5% is actually a 70% annualized.
If you're curious, yes, this also produced positive returns over the last 3-years, even though the stock has so under-performed as a buy and hold investment, and done so poorly on earnings calls.
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 and after 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 Twitter Inc (NYSE:TWTR) as of this writing.
Back-test Link (does require custom earnings settings).