Adobe Systems Inc

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Swing Trading the Bullish Momentum in Adobe Systems Before Earnings

Swing Trading the Bullish Momentum in Adobe Systems Before Earnings

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 pattern of bullish momentum in Adobe Systems Incorporated (NASDAQ:ADBE) stock just days before earnings, and we can track that by looking at swing returns in the option market.

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.

The Short-term Option Swing Trade Ahead of Earnings in Adobe Systems Incorporated
We will examine the outcome of going long a weekly at-the-money call option in Adobe Systems Incorporated just three calendar days before earnings and selling the call on the day of earnings. Since ADBE announces earnings after the market closes, this back-test does not take a position during the earnings release.

We do not, yet, have a confirmed date for ADBE's next earnings with some estimates putting it about a week away and others as soon as this Thursday.

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.

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 ADBE by using the Trade machine Pro scanner, looking over the NASDAQ 100 and the 3-day pre-earnings long call back-test.

Then we optimized ADBE by lengthening the back-test to include the trading day of earnings, since the company reports after the close, we still avoid any actual earnings risk.

Below we present the back-test stats over the last three-years in Adobe Systems Incorporated:

ADBE: Long 50 Delta Call

% Wins: 90.9%
Wins: 10 Losses: 1
% Return:  448% 

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 448% return, testing this over the last 11 earnings dates in Adobe Systems Incorporated. That's a total of just 33 days (3-day holding period for each earnings date, over 11 earnings dates).

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 Adobe Systems Incorporated, but over the recent history, this bullish option trade has won ahead of earnings.

Setting Expectations
While this strategy has an overall return of 448%, the trade details keep us in bounds with expectations:
      The average percent return per trade was 30.8% over 3-days.
      The average percent return per winning trade was 34% over 3-days.
      The percent return per losing trade was -2.1% over 3-days.

Looking at More Recent History
We did a multi-year back-test above, now we can look at just the last 6-months:

ADBE: Long 50 Delta Call

% Wins: 100%
Wins: 2 Losses: 0
% Return:  53.5% 

Tap Here to See the Back-test

We're now looking at 53.5% returns, on 2 winning trades.
      The average percent return over the last year per trade was 26.7% over 3-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.