Regeneron Pharmaceuticals Inc, REGN, earnings, option, before, stock, Side-Stepping
LEDE
Just yesterday we posted an interesting back-test on Teva Pharma which came to our attention due to some market moving news with the FDA. Today we will look at another non-directional back-test ahead of earnings, one that has has seen strong results over the last two-years in Regeneron Pharmaceuticals Inc (NASDAQ:REGN).
Let market anxiety come, this back-test seeks volatility, and a down market is a friend to this trade.
Stock Return Chart
Without really diving deep into the chart, we can just eyeball the moves REGN stock makes before earnings -- we don't see a real directional pattern, but we do see a volatility pattern, and that's exactly what this back-test aims to measure.
The Trade Before Earnings: When it Works
We have added a new strategy to the Pro Scanner, which a two-week pre-earnings straddle.
What a trader wants to do is to see the results of buying an at the money straddle two-weeks before earnings, and then sell that straddle just before earnings.
The goal of this type of trade is to benefit from a unique and 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.
If the stock is volatile during this period, this generally is a winning strategy, if it does not move, this strategy will likely not be profitable and the complete back-test below discusses that possibility.
Here is the setup:
We are testing opening the position 14 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.
Our data vendor, Wall Street Horizon, does not have a confirmed earnings date for REGN, but we start with an estimate of 2017-11-03 (before the market opens). 14 calendar days before then would be October 19th. But, of course, we need a verified date before any action can be taken.
Once we apply that simple rule to our back-test, we run it on an at-the-money straddle:
RISK MANAGEMENT
We can add another layer of risk management to the back-test by instituting and 40% stop loss and a 40% limit gain. If the stock doesn't move a lot during this period and the options begin to decay in value, a stop loss can prevent a total loss.
On the flip side, if the stock does move in one direction or another enough, the trade can be closed early for a profit. Here are those settings:
In English, at the close of each trading day we check to see if the total position is either up or down 40% relative to the open price. If it was, the trade was closed.
Returns
If we did this long at-the-money straddle in Regeneron Pharmaceuticals Inc (NASDAQ:REGN) over the last two-years but only held it before earnings we get these results:
Tap Here to See the Back-test
We see a 206% return, testing this over the last 8 earnings dates in Regeneron Pharmaceuticals Inc. That's a total of just 104 days (13 days for each earnings date, over 8 earnings dates).
We can also see that this strategy hasn't been a winner all the time, rather it has won 7 times and lost once, for a 87.5% win-rate.
Setting Expectations
While this strategy has an overall return of 206%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 32.5% over 13-days.
WHAT HAPPENED
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.
To see how to do this for any stock we welcome you to watch this quick demonstration video:
Tap Here to See the Tools at Work
Thanks for reading.
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.
Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.
Catching the Volatility Move Before Earnings in Regeneron Pharmaceuticals Inc
Regeneron Pharmaceuticals Inc (NASDAQ:REGN) : Side-Stepping Stock Direction Risk in Option Trading Before Earnings
Date Published: 2017-10-5LEDE
Just yesterday we posted an interesting back-test on Teva Pharma which came to our attention due to some market moving news with the FDA. Today we will look at another non-directional back-test ahead of earnings, one that has has seen strong results over the last two-years in Regeneron Pharmaceuticals Inc (NASDAQ:REGN).
Let market anxiety come, this back-test seeks volatility, and a down market is a friend to this trade.
Stock Return Chart
Without really diving deep into the chart, we can just eyeball the moves REGN stock makes before earnings -- we don't see a real directional pattern, but we do see a volatility pattern, and that's exactly what this back-test aims to measure.
The Trade Before Earnings: When it Works
We have added a new strategy to the Pro Scanner, which a two-week pre-earnings straddle.
What a trader wants to do is to see the results of buying an at the money straddle two-weeks before earnings, and then sell that straddle just before earnings.
The goal of this type of trade is to benefit from a unique and 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.
If the stock is volatile during this period, this generally is a winning strategy, if it does not move, this strategy will likely not be profitable and the complete back-test below discusses that possibility.
Here is the setup:
We are testing opening the position 14 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.
Our data vendor, Wall Street Horizon, does not have a confirmed earnings date for REGN, but we start with an estimate of 2017-11-03 (before the market opens). 14 calendar days before then would be October 19th. But, of course, we need a verified date before any action can be taken.
Once we apply that simple rule to our back-test, we run it on an at-the-money straddle:
RISK MANAGEMENT
We can add another layer of risk management to the back-test by instituting and 40% stop loss and a 40% limit gain. If the stock doesn't move a lot during this period and the options begin to decay in value, a stop loss can prevent a total loss.
On the flip side, if the stock does move in one direction or another enough, the trade can be closed early for a profit. Here are those settings:
In English, at the close of each trading day we check to see if the total position is either up or down 40% relative to the open price. If it was, the trade was closed.
Returns
If we did this long at-the-money straddle in Regeneron Pharmaceuticals Inc (NASDAQ:REGN) over the last two-years but only held it before earnings we get these results:
| REGN Long At-the-Money Straddle |
|||
| % Wins: | 58.33% | ||
| Wins: 7 | Losses: 1 | ||
| % Return: | 206% | ||
Tap Here to See the Back-test
We see a 206% return, testing this over the last 8 earnings dates in Regeneron Pharmaceuticals Inc. That's a total of just 104 days (13 days for each earnings date, over 8 earnings dates).
We can also see that this strategy hasn't been a winner all the time, rather it has won 7 times and lost once, for a 87.5% win-rate.
Setting Expectations
While this strategy has an overall return of 206%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 32.5% over 13-days.
WHAT HAPPENED
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.
To see how to do this for any stock we welcome you to watch this quick demonstration video:
Tap Here to See the Tools at Work
Thanks for reading.
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.
Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.