Date Published: 2017-05-23
Written by Ophir Gottlieb
This article can be seen as a video or in the written word. The video is presented first and the article below it. The video includes Visa, Apple, and Goldman Sachs, while the article focuses solely on Visa.
While Visa Inc (NYSE:V) just broke another all-time high in stock price, one option trade after earnings has been a consistent winner, has a much shorter holding period, and has vastly outperformed the stock. It takes no earnings risk, little stock direction risk, and over the last year has never lost while returning over 100% annualized returns.
The Trade After 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 Visa Inc, irrespective of whether the earnings move was up or down, if we waited two-days after the stock move from earnings, and then sold an at the money put spread, the results were very strong.
We can examine this, objectively, with a custom option back-test. Here is our earnings set-up:
* Open short put spread 2 day after earnings
* Close short put spread 29 days later
* Use the option that is closest to but greater than 30-days away from expiration
Here are the results over the last year -- while also comparing this strategy to the less refined idea of just selling the put spread every month, while also avoiding earnings.
Focusing in just the month after earnings, we see a 79.1% return over a total of 12 earnings releases. But, doing this strategy all year returned just 57.7%. For each approach, no earnings risk was taken -- this is not a coin flip over earnings.
But there's more here. For clarity, this is how the two strategies differ:
By only trading the month after earnings, we are looking at a strategy that only had open positions for 12 full months (one-month per earnings period, 4 earnings releases per year). The other approach did in fact take full 3-years to realize and that means it tied up the margin for much longer.
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 year, again compared side-by-side to the short put strategy that traded all months:
The "single-month" approach returned 35.6% over the last four earnings cycles, but since this is a total of a four-month holding period, that 35.6% is actually over 105% annualized. The approach that held during all months returned just 10.3%, and that is the annual return -- it took a full year to realize.
During the last year, the stock is up 21.8%.
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, Apple, Google, Netflix and of course Visa Inc are just a handful of examples. There has been edge here with this strategy.
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 Visa Inc as of this writing.