Netflix Inc

+17.34 (+4.81%)

People also watch

Tax Reform and Pre-earnings Momentum Trade in Netflix

Netflix Inc (NASDAQ:NFLX) : The One-Week 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.

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 a 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.

There is a bullish momentum pattern in Netflix Inc (NASDAQ:NFLX) 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 Netflix Inc, which is due to release earnings in mid January.

We will examine the outcome of getting long a weekly call option in Netflix Inc 7-days before earnings (using calendar days) and selling the call before the earnings announcement -- that is, on the day of earnings, but before the market closes, since NFLX reports earnings after the market closes.

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 discovered NFLX by using the CML Trade Machine Pro scanner, looking at the NASDAQ 100 and the "7-days Pre-earnings long call."

Of course, there are a few gems there that we will be addressing in the next couple of weeks.

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

NFLX: Long 40 Delta Call

% Wins: 83%
Wins: 10 Losses: 2
% Return:  303% 

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 296% return, testing this over the last 12 earnings dates in Netflix Inc. That's a total of just 96 days (8-days for each earnings date, over 12 earnings dates).

We can also see that this strategy hasn't been a winner all the time, rather it has won 10 times and lost 2 times, for a 83% win-rate and again, that 303% return in six-months of trading.

Setting Expectations
While this strategy had an overall return of 303%, the trade details keep us in bounds with expectations:
      The average percent return per trade was 29.7% in 8 days.
      The average percent return per winning trade was 44.3% in 8 days.
      The average percent return per losing trade was -43.3% in 8 days.

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

NFLX: Long 40 Delta Call

% Wins: 100.00%
Wins: 4 Losses: 0
% Return:  149% 

Tap Here to See the Back-test

We're now looking at 149% returns, on 4 winning trades and 0 losing trades. It's worth noting again that we are only talking about one-week of trading for each earnings release, so this is 149% in just 4-weeks of total trading which annualizes to over 1,500%.
      The average percent return over the last year per trade was 32.6%.

Bull markets tend to create optimism, whether it's deserved or not. To see how to find the best performing historical momentum, technical or non-directional trades 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.