Date Published: 2017-06-01
Written by Ophir Gottlieb
There is a way to trade Broadcom Ltd (NASDAQ:AVGO) options right after earnings that has been a winner more than 85% of the time over the last two-years and has returned almost 120% annualized returns over the last six-months.
The Trade After Earnings
The earning moves is the headline grabber for stocks, but for Broadcom Ltd, irrespective of whether the earnings move was up or down, if we waited two-days after the market move from earnings, and then sold an out of the money put spread, the results were very strong and risk was well defined.
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 option that is closest to but greater than 30-days away from expiration.
Here is the timing of the trade in an image:
And here are the results of implementing this strategy:
Focusing in just the month after earnings, we see a 35.3% return over a total of 7 earnings releases. We also see that this idea won 6 times and lost 1 times. Since we are covering just seven earnings releases, and each trade is just one-month in length, that 35.3% is over just a seven-month period, which comes out to 60% if annualized.
This is not a trade that ties up capital for very long.
Our idea here is that after earnings are reported, and after the stock does all of its gymnastics, up or down, that two-days following the earnings move and for the next month, the stock is then in a quiet period.
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:
The "single-month" approach returned 20.2% over the last four earnings cycles -- that's just four months of trading.
Finally, here are the results over the last six-months:
That's about 20% over just two earnings cycles, with both trades turning out to be winners.
If we consider that the 19.8% return was just over two-months (two earnings cycles, holding the short-put spread for one-month each), the return is actually just below 120% annualized.
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 Broadcom Ltd as of this writing.