Palo Alto Networks Inc

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Swing Trading Earnings Bullish Momentum With Options in Palo Alto Networks Inc

Palo Alto Networks Inc (NYSE:PANW) : Swing Trading Earnings Bullish Momentum With Options

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A remarkable shift in earnings reactions is happening in Palo Alto Networks Inc (NYSE:PANW) and it makes an already compelling pattern of bullish momentum before earnings yet more attention worthy.

This is a short-term swing trade, it won't be a winner forever, and it can be easily derailed by a couple of down days in the market irrespective of Palo Alto Networks Inc news, but for now it has shown a repeating success that has not only returned 131%, but has also shown a win-rate of 87.5% in the last two-years, and 100% in the last year.

The idea is quite simple -- trying to take advantage of a pattern in short-term bullishness just before earnings, and then getting out of the way so no actual earnings risk is taken.

That is, totally independent of whether the stocks have a pattern of beating earnings, in the 3-days before earnings, there is a small group that have risen sharply ahead of the actual news.

Palo Alto Networks is a cyber security firm that tends to make large moves off of earnings -- both up and down. But, in the most recent two-earnings reports, the company has turned things around and has gapped up hard off of the report.

Here is an one-year stock chart, where the blue "E" icons represent the earnings date. We have circled the large stock moves following earnings:

We can see the tendency for large moves off of earnings, and also the reversal in the trend which has seen large earnings beats.

While Palo Alto Networks just reported earnings in late August and the next earnings date is likely sometime in November, right now is the time, with the prior results fresh in our minds, to note this reversal. Now, onto the back-test.

The initial discovery of this pre-earnings pattern came from the Trade Machine Pro Scanner. We looked at pre-earnings back-tests of long calls that were opened 3-days before earnings and closed one-day before in the S&P 500.

We then sorted by the earnings date, and found this:

The Short-term Option Swing Trade Ahead of Earnings in Palo Alto Networks Inc
We will examine the outcome of going long a weekly call option in Palo Alto Networks Inc just three calendar days before earnings and selling the call one day before the actual news.

This is construct of the trade, noting that the short-term trade closes before earnings and therefore does not take a position on the earnings result.

Often times we look at option set-ups that are longer-term, and take no directional bet -- this is not one of those times. This is a no holds barred short-term bullish swing trade with options and that's it. It's a bullish bet, so must be conscious of the delta risk.

We can add another layer of risk management to the back-test by instituting and 40% stop loss and a 40% limit gain. Here is that setting:

In English, at the close of each trading day we check to see if the long option is either up or down 40% relative to the open price. If it was, the trade was closed.

Below we present the back-test stats over the last two-years in Palo Alto Networks Inc:

PANW: Long 40 Delta Call

% Wins: 87.5%
Wins: 7 Losses: 1
% Return:  131% 

Tap Here to See the Back-test

We see a 131% return, testing this over the last 8 earnings dates in Palo Alto Networks Inc. That's a total of just 16 days (2-day holding period for each earnings date, over 8 earnings dates). That's the power of following the short-term pattern of bullishness ahead earnings -- and not taking on the actual risk from the earnings outcome.

The trade will lose sometimes, and since it is such a short-term position, it can lose from news that moves the whole market that has nothing to do with Palo Alto Networks Inc, but over the recent history, this bullish option trade has won ahead of earnings. If add into the story a recent up turn in earning results, we have quite the compelling back-test.

Setting Expectations
While this strategy has an overall return of 84.1%, the trade details keep us in bounds with expectations:
      The average percent return per trade was 18.9% (over just two-days).
      The average percent return per winning trade was 24.5% (over just two-days).
      The percent return for the losing trade was -20% (over just two-days).

Looking at More Recent History
We did a multi-year back-test above, now we can look at just the last year:

PANW: Long 40 Delta Call

% Wins: 100%
Wins: 4 Losses: 0
% Return:  64.8% 

Tap Here to See the Back-test

We're now looking at 64.8% returns, on 4 winning trades and 0 losing trades.
      The average percent return over the last year per trade was 19.7%.

Bull markets tend to create optimism, whether it's deserved or not. With the recent history of earnings beats, this gets twice the attention and is worth noting well ahead of the next event. 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.