Avoid Bear Market Risk: Option Trading Before Earnings in Ohr Pharmaceuticals Inc

Ohr Pharmaceuticals Inc (NASDAQ:OHRP) : Avoid Bear Market Risk: Option Trading Before Earnings

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With the market's direction becoming tenuous, we can explore option trading opportunities in Ohr Pharmaceuticals Inc (NASDAQ:OHRP) that do not rely on stock direction. It turns out, over the long-run, for stocks with certain tendencies like Ohr Pharmaceuticals Inc, there is a clever way to trade market anxiety or market optimism before earnings announcements with options.

This approach has returned 73.5% with a total holding period of just 60 days, or an annualized rate of 447.1%. Now that's worth looking into.

The Trade Before Earnings
What a trader wants to do is to see the results of buying an at the money straddle a few days before earnings, and then sell that straddle just before earnings. 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. Here is the setup:

We are testing opening the position 6 calendar 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 Ohr Pharmaceuticals Inc (NASDAQ:OHRP) over the last three-years but only held it before earnings we get these results:

Long At-the-Money Straddle

% Wins: 66.67%
Wins: 8 Losses: 4
% Return:  73.5% 
% Annualized:  447.1% 

Tap Here to See the Back-test

We see a 73.5% return, testing this over the last 12 earnings dates in Ohr Pharmaceuticals Inc. That's a total of just 60 days (5 days for each earnings date, over 12 earnings dates). That's an annualized rate of 447.1%.

We can also see that this strategy hasn't been a winner all the time, rather it has won 8 times and lost 4 times, for a 67% win-rate and again, that 73.5% return in less than two-full months of trading.

Setting Expectations
While this strategy has an overall return of 73.5%, the trade details keep us in bounds with expectations:
      The average percent return per trade was 3.82%.

Option Trading in the Last Year
We can also look at the last year of earnings releases and examine the results:

Long At-the-Money Straddle

% Wins: 100.00%
Wins: 4 Losses: 0
% Return:  21.1% 
% Annualized:  385.1% 

In the latest year this pre-earnings option trade has 4 wins and lost 0 times and returned 21.1% which annualizes to 385.1% .
      Over just the last year, the average percent return per trade was 5.21%.

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.