Dave & Buster's Ente

+1.53 (+2.97%)

People also watch

The Five-Day Pre-earnings Momentum Trade With Options in Dave & Buster's Entertainment Inc

Dave & Buster's Entertainment Inc (NASDAQ:PLAY) : The Five-Day Pre-earnings Momentum Trade 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.

There is a bullish momentum pattern in Dave & Buster's Entertainment Inc (NASDAQ:PLAY) stock 5 calendar days before earnings, and we can capture that phenomenon explicitly by looking at returns in the option market. The strategy won't work forever, but for now it is a momentum play that has not only returned 357.8%, but has also shown a win-rate of 100%.

According to our data provider, Wall Street Horizon, PLAY announces earnings 12-5-2017 after the market closes. 5-days before that would be today, at the close of trading.

The logic behind the option trading backtest is easy to understand -- in a bull market there can be a stock rise ahead of earnings on optimism, or upward momentum, that sets in the five calendar before an earnings date. Now we can see it in Dave & Buster's Entertainment Inc.

The Bullish Option Trade Before Earnings in Dave & Buster's Entertainment Inc
We will examine the outcome of getting long a weekly call option in Dave & Buster's Entertainment Inc 5-days before earnings (using calendar days) and selling the call before the earnings announcement.

Here's the set-up in great clarity; again, note that the trade closes before earnings, so this trade does not make a bet on the earnings result.

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 result by using the Trade Machine Pro Scanner, scanning over all tickers, and then looking at the 7-day pre-earnings long call strategy.

There are only two companies in the entire optionable market (~3,700 companies) which have seen this back-test return a win for 3-straight years without a loss. PLAY is one of them.

Here are the results over the last three-years in Dave & Buster's Entertainment Inc:

PLAY: Long 40 Delta Call

% Wins: 100%
Wins: 11 Losses: 0
% Return:  357.8% 

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).

This is not a silver bullet, rather it's a bullish strategy. In the short-term it hasn't seen any losses, but more importantly, whether or not it loses on any given earnings run-up, the 357.8%  return in less than two-full months of trading is predicated on an idea of consistent momentum.

Setting Expectations
While this strategy had an overall return of 357.8%, the trade details keep us in bounds with expectations:
      The average percent return per trade was 49.84% over each five day period.

Back-testing More Time Periods in Dave & Buster's Entertainment Inc
Now we can look at just the last year as well:

PLAY: Long 40 Delta Call

% Wins: 100.00%
Wins: 4 Losses: 0
% Return:  188.8% 

Tap Here to See the Back-test

We're now looking at 188.8% returns, on 4 winning trades and 0 losing trades. It's worth noting again that we are only talking about five-days of trading for each earnings release, so this is 188.8% in just 4-weeks of total trading.
      The average percent return over the last year per trade was 63.82% over just five 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.