Avoid Bear Market Risk: The Secret to Option Trading Before Earnings in TJX Companies Inc (The)
TJX Companies Inc (The) (NYSE:TJX) : Avoid Bear Market Risk: The Secret to Option Trading Before Earnings
What a trader wants to test is buying an at the money straddle a few days before earnings, and then sell that straddle just before earnings, taking no earnings risk and no stock direction risk.
The goal is to benefit from a unique and very short time frame when the stock might move 'a lot', either due to earnings anxiety (stock drops before earnings) or earnings optimism (stock rises before earnings), but taking no actual earnings risk.
This approach has returned 204% with a total holding period of just 48 days in TJX Companies Inc (The) (NYSE:TJX) and has won 11 of the last 12 pre-earnings cycles. TJX has earnings due out sometime in mid-August (we don't have a confirmed date yet).
The set-up is easy -- here is the custom setting:
We are testing opening the position 5 days before earnings and then closing the position 1 day before earnings. This is not making any earnings bet. This is not making any stock direction bet.
Once we apply that simple rule to our back-test, we run it on an at-the-money straddle:
If we did this long at-the-money (also called '50-delta') straddle in TJX Companies Inc (The) (NYSE:TJX) over the last three-years but only held it before earnings we get these results:
We see a 204% return, testing this over the last 11 earnings dates in TJX Companies Inc (The). That's a total of just 48 days (4 days for each earnings date, over 12 earnings dates).
We can also see that this strategy hasn't been a winner all the time, rather it has won 11 times and lost 1 time, for a 91.7% win-rate.
We note that the CML Trade Machine Pro back-tester will soon have a scanner on to of the back-testing power which can search for any strategy, but in particular this one -- a non-earnings, non-stock direction, short-term bet with limited downside.
While this strategy has an overall return of more than 200%, the trade details keep us in bounds with expectations:
We see an average trade return of 15.9%, with the winners averaging 17.6% upside and the one loser costing -3.5%.
We can also focus in on the last year. Here are those results:
That's a winning trade in each of the last 4 pre-earnings periods with a total return of 42.5%. For completeness we note that the average return per trade (all winners) was 11.6% each within a four-day period.
This is it -- this is how people profit from the option market -- finding trading opportunities that avoid earnings risk and work equally well during a bull or bear market.
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.