Ambarella Inc

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The One-Week Pre-earnings Momentum Trade With Options in Ambarella Inc

Ambarella Inc (NASDAQ:AMBA): The One-Week Pre-earnings Momentum Trade With Options

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While these trades cannot win all the time, the win rates have been quite high for our community, as have the returns, so we will continue to document the pattern.

This is yet another a bullish momentum pattern ahead of earnings, this time in Ambarella Inc (NASDAQ:AMBA). We look 6 calendar days before earnings, and we can capture that phenomenon explicitly by looking at returns in the option market.

Over the last 3-years we're looking at a trade that has won 11 out of 12 times for a 1344% return.

According to NASDAQ, Ambarella has earnings due out 8-31-2017 after the market closes. Six days before that date is 8-25-2017.

We have covered Ambarella Inc extensively in CML Pro, and detail how we think of the company's video-chip sets as the "eyes" for various technologies -- that's drones, video surveillance, parts of self-driving cars and others.

The Bullish Option Trade Before Earnings in Ambarella Inc
We will examine the outcome of getting long a weekly call option in Ambarella Inc 6-days before earnings (using calendar days) and selling the call before the earnings announcement.

Here's the set-up in great clarity; again, note that the trade closes before earnings, so this trade does not make a bet on the earnings result.

Here are the results over the last three-years in Ambarella Inc:

AMBA: Long 40 Delta Call

% Wins: 91.7%
Wins: 11 Losses: 1
% Return:  1344% 

Tap Here to See the Back-test

We see a 1344% return, testing this over the last 12 earnings dates in Ambarella Inc. That's a total of just 72 days (6-days for each earnings date, over 12 earnings dates). This has been the results of following the trend of bullish sentiment into earnings while avoiding the actual earnings result.

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.

Setting Expectations
While this strategy had an overall return of 1344%, the trade details keep us in bounds with expectations:
      The average percent return per trade was 47.4%.
      The average percent return per winning trade was 56%.
      The percent return for the losing trade was -47.3%.

Back-testing More Time Periods in Ambarella Inc
Now we can look at just the last year as well:

AMBA: Long 40 Delta Call

% Wins: 75%
Wins: 3 Losses: 1
% Return:  78.9% 

Tap Here to See the Back-test

We're now looking at 78.9% returns, on 3 winning trades and 1 losing trade. It's worth noting again that we are only talking about one-week of trading for each earnings release.
      The average percent return per trade was 22.1%.
      The average percent return per winning trade was 45.2%.
      The percent return for the losing trade was -47.3% (obviously the same as before since it was the only loss).

If you like what you're reading, learn more about scientific option trading in a free webinar we are holding:

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Bull markets tend to create optimism, whether it's deserved or not. This has been a tradable phenomenon in Ambarella. To see how to test this for any stock we welcome you to watch this quick demonstration video:
Tap Here to See the Tools at Work

Risk Disclosure
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.