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The Earnings Option Trade in NVIDIA Corporation Nobody Is Talking About



NVIDIA Corporation (NASDAQ:NVDA) : The Volatility Option Trade After Earnings

Date Published:

LEDE
It's a must -- to diversify option trading away from one type of indicator, like momentum. We will write about the remarkable (and it is remarkable) pre-earnings momentum in Nvidia, but first, let's look at it from the other end.

We will look at a non directional back-test that is after earnings. And soon, yes, we will turn to the momentum trade that has Wall Street standing at attention.

Preface
This is a slightly advanced option trade that bets on volatility for a period that starts one-day after NVIDIA Corporation (NASDAQ:NVDA) earnings and lasts for the 6 calendar days to follow, that has been a winner for the last 2 years. We note the use of strict risk controls in this analysis.

NVIDIA Corporation (NASDAQ:NVDA) Earnings
In NVIDIA Corporation, irrespective of whether the earnings move was large or small, if we waited one-day after earnings and then bought an one-week straddle (using weekly options), the results were quite strong. This trade opens one-day after earnings were announced to try to find a stock that moves a lot after the earnings announcement.

Simply owning options after earnings, blindly, is likely not a good trade, but hand-picking the times and the stocks to do it in can be useful. We can test this approach without bias with a custom option back-test. Here is the timing set-up around earnings:



Back-test Rules
* Open the long straddle one-calendar day after earnings.
* Close the straddle 7 calendar days after earnings.
* Use the options closest to 7 days from expiration (but at least 7-days).

This is a straight down the middle volatility bet -- this trade wins if the stock is volatile the week following earnings and it will stand to lose if the stock is not volatile. This is not a silver bullet -- it's a trade that needs to be carefully examined.

But, this is a stock direction neutral strategy, which is to say, it wins if the stock moves up or down -- it just has to move.

RISK CONTROL
Since blindly owning volatility can be a quick way to lose in the option market, we will apply a tight risk control to this analysis as well. We will add a 40% stop loss and a 40% limit gain.



In English, at the close of every trading day, if the straddle is up 40% from the price at the start of the trade, it gets sold for a profit. If it is down 40%, it gets sold for a loss. This also has the benefit of taking profits if there is volatility early in the week rather than waiting to close 7-days later.

TRADE DISCOVERY
We found this back-test results using the Trade Machine™ Pro scanner. We looked at the Nasdaq 100 and the "7 Days Post Earnings, Long Straddle" scan.



There are very few results that have performed well in the past and only four companies out of the entire index that have seen a win all four times in the last year. Nvidia is one of those.



RESULTS
If we bought the straddle in NVIDIA Corporation (NASDAQ:NVDA) over the last two-years but only held it after earnings we get these results:

NVDA: Long Straddle

% Wins: 75%
Wins: 6 Losses: 2
% Return:  255% 

Tap Here to See the Back-test

The mechanics of the TradeMachine™ are that it uses end of day prices for every back-test entry and exit (every trigger).

We see a 255% return, testing this over the last 8 earnings dates in NVIDIA Corporation. That's a total of just 48 days (6 days for each earnings date, over 8 earnings dates).

Looking at Averages
The overall return was 200.6%; but the trade statistics tell us more with average trade results:
      The average return per trade was 25.3% over 6-days.
      The average return per winning trade was 43.1% over 6-days.
      The average return per losing trade was -28% over 6-days.

Looking at the Last Year
While we just looked at a multi-year back-test, we can also hone in on the most recent year with the same test:

NVDA: Long Straddle

% Wins: 100%
Wins: 4 Losses: 0
% Return:  256.9% 

Tap Here to See the Back-test

Now we see a 256.9% return over the last year and a 100% win-rate.

      The average return for the last year per trade was 48.72% over 6-days.

WHAT HAPPENED
This is it -- this is how to identify historically profitable trades in the option market that others may not be looking for -- 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.