Apple Inc

-0.64 (-0.37%)

People also watch

Right After Earnings, The Intelligent Options Trade in Incyte Corporation

Incyte Corporation (NASDAQ:INCY) : Right After Earnings, The Intelligent Options Trade

Date Published:

This is a simple option trade that starts two-days after Incyte Corporation (NASDAQ:INCY) earnings and lasts for the one month to follow, that has been a winner for 3 straight years.

Incyte Corporation (NASDAQ:INCY) Earnings
While the mainstream media likes to focus on the actual earnings move for a stock, that's the distraction when it comes to the option market.

For Incyte Corporation, irrespective of whether the earnings move was up or down, if we waited two calendar days after the stock move, and then sold a one-month out of the money put spread, the results were simply staggering. We use two-days to allow the stock to fully reach equilibrium post earnings.

We can examine this intelligent approach, 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 options

If we sold this 30/10 delta out-of-the-money put spread in Incyte Corporation (NASDAQ:INCY) over the last three-years but only held it after earnings we get these results:

INCY: Short
30 Delta / 10 Delta
Put Spread

% Wins: 100%
Wins: 11 Losses: 0
% Return:  100.7% 
% Annualized:  119% 

We see a 100.7% return, testing this over the last 11 earnings dates in Incyte Corporation. That's a total of just 308 days (28 days for each earnings date, over 11 earnings dates). That's an annualized rate of 119%.

This is not a magic bullet, rather it's a strategy. In the short-term it hasn't seen any losses, but more importantly, whether or not it loses on any given earnings run-up, the 100.7%  return is based on an idea of consistency. It will lose some times, but over the long-run, it has won.

Setting Expectations
While this strategy had an overall return of 100.7%, the trade details keep us in bounds with expectations:
      The average percent return per trade was 12.08% in just 27-calendar days.

While a short put spread is a strategy that gains profits if the underlying stock "doesn't go down a lot," there is more to this with Incyte Corporation.

What we're after with this approach is identifying companies that make their large stock move the day after earnings -- whether that's up or down -- and after that, find a sense of equilibrium in the stock price for the next month. This is what we find in Incyte Corporation (NASDAQ:INCY) .

This is it -- this is how people profit from the option market -- it's not about guessing; ever.