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Swing Trading Bullish Earnings Momentum in Momo Inc (NASDAQ:MOMO)

Momo Inc (NASDAQ:MOMO) : Swing Trading Earnings Bullish Momentum With Options

Date Published:

The results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.

The probabilities have been working out nicely of late, in particular with the very short-term bullish swing trades ahead of earnings in tech stocks. Before we dive in, let's just remember that even when patterns repeat and trends are hot, always understand the difference between a probability and a certainty.

Right now the probabilities are feeling very good for the patterns uncovered for Trade Machine members -- but this is not a silver bullet. Trading has risk, even when we come upon a time like the recent past where it feels like it's automatic, it is not and never will be. Having said that, let's follow the trend with this analysis.

Last week we saw two of our highlights bring in results: Swing Trading Earnings Bullish Momentum With Options in Intuit repeated its pattern and Swing Trading Earnings Bullish Momentum With Options in Palo Alto Networks also repeated its pattern.

Here are the results of those two back-test from last week.

Today, we stick with this short swing momentum back-test ahead of earnings in technology, rather than look for the longer-term one-week or two-weeks momentum back-tests or non-directional back-tests.

Momo Inc (NASDAQ:MOMO) is a Chinese social media platform with earnings due out on (CORRECTED) 11-28-2017 before the market opens, according to our data provider, Wall Street Horizon.

Three trading days before would be (CORRECTED) 11-22-2017, due to the Thanksgiving holiday.

Here is a two-year stock chart of MOMO, with the recent past highlighted:

We can see a rather steep sell-off after the most recent earnings report, but alas, the pre-earnings momentum appears to be building yet again. That light blue line is the 200-day moving average.

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. Now we can see it in Momo Inc.

The Short-term Option Swing Trade Ahead of Earnings in Momo Inc
We will examine the outcome of going long a weekly call option in Momo 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.

We found this back-test using the Trade Machine Pro Scanner, looking at all tickers and the the 3-day pre-earnings long call.

Below we present the back-test stats over the last two-years in Momo Inc:

MOMO: Long 40 Delta Call

% Wins: 87.5%
Wins: 7 Losses: 1
% Return:  362% 

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 362% return, testing this over the last 8 earnings dates in Momo Inc. That's a total of just 24 days (3-day holding period for each earnings date, over 8 earnings dates).

This short-term trade hasn't won every time, and it won't, but it has been a winner 7 times and lost 1 time, for a 87.5% win-rate, and it's the probabilities that we are reviewing rather than any kind of magic silver bullet.

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 Momo Inc, but over the recent history, this bullish option trade has won ahead of earnings.

Setting Expectations
While this strategy has an overall return of 362%, the trade details keep us in bounds with expectations:
      The average percent return per trade was 44.2% over just 3-trading days.

      The average percent return per winning trade was 54% over just 3-trading days.
      The percent return for the losing trade was -24.5% over just 3-trading days.

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

MOMO: Long 40 Delta Call

% Wins: 75%
Wins: 3 Losses: 1
% Return:  270% 

Tap Here to See the Back-test

We're now looking at 270% returns, on 3 winning trades and 1 losing trade.
      The average percent return over the last year per trade was 54.2% over just 3-trading days.

Bull markets tend to create optimism, whether it's deserved or not. 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.

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.