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The Stunning Pre-earnings Momentum Pattern in Apple

Apple (NASDAQ:AAPL) : The One-Week Pre-earnings Momentum Trade With Options

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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.

We don't debate politics here, we look at trading and in that vein we must address the fact that one of the largest tax reformations (cuts) becomes a new law in 2018 and the impact on the market in the immediate-term could be quite bullish.

The tax bill contains an 8% one-time tax on illiquid assets and a 15.5% tax on cash and cash equivalents held overseas. Meanwhile, the corporate tax rate cut will likely push companies to invest in new data centers, cloud services and other technology. That narrative is also backed by the increased deductions for capital spending.

So -- if that is the case, in the near-term, then looking at the bullish momentum in the star studded tech companies is well worth the continued focus, especially the one with the most cash in the world and therefore the one that will benefit most from its repatriation of that cash.

On top of the tax reform, we have another phenomon to digest, simplaystated -- there is no stock like Apple. Not only is it the largest company in the world by market cap, with the largest quarterly earnings ever, it is also a magnet for click bait news.

Some mainstream media outlets ask contributors for articles that just mention the company, so they can tag it with the ticker and get into various news feeds. Apple's iPhone is a phenomenon -- the most profitable consumer technology device ever.

While we dive deep into Apple's future at CML Pro Research, today we discuss the pre-earnings pattern which is in some part in fact due to this manufactured news traffic by simply tagging the ticker 'AAPL.' Let's take advantage of this phenomenon.

There is a bullish momentum pattern in Apple (NASDAQ:AAPL) stock 7 calendar days before earnings, and we can capture that phenomenon explicitly by looking at returns in the option market.

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 one-week before an earnings date. Now we can see it in Apple Inc.

The Bullish Option Trade Before Earnings in Apple Inc
We will examine the outcome of getting long a weekly call option in Apple Inc 7-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 back-test, as we always do, with the Trade Machine Pro scanner. We tapped on NASDAQ 100 as our ticker group, and then we tapped on the "7-days pre-earnings Long Call" strategy.

There is a treasure trove of tech stocks in this list, from Nvidia to Microsoft. Today we look at Apple.

Here are the results over the last three-years in Apple Inc:

AAPL: Long 40 Delta Call

% Wins: 67%
Wins: 8 Losses: 4
% Return:  523.7% 

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 523.7% return, testing this over the last 12 earnings dates in Apple Inc. That's a total of just 84 days (7-days for each earnings date, over 12 earnings dates). This has been the results of following the trend of bullish sentiment into earnings while avoiding the actual earnings result.

Setting Expectations
While this strategy had an overall return of 523.7%, the trade details keep us in bounds with expectations:
      The average percent return per trade was 43.93%.
      The average percent return per winning trade was 83.2%.
      The average percent return per losing trade was -34.6%.

This is a back-test that has shown twice as many winning trades as losing ones, and the winners are more than twice as large in average return as the losers. It's this combination that creates those outsized returns (523%).

Back-testing More Time Periods in Apple Inc
Now we can look at just the last year as well:

AAPL: Long 40 Delta Call

% Wins: 75.00%
Wins: 3 Losses: 1
% Return:  255.5% 

Tap Here to See the Back-test

We're now looking at 255.5% returns, on 3 winning trades and 1 losing trades.
      The average percent return over the last year per trade was 49.02%.

Bull markets tend to create optimism, whether it's deserved or not. To see how to test this for any stock, and to discover the tech names with even greater tendencies for this bullish momentum right before earnings, 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.