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Avoid Bear Market Risk: The Secret to Option Trading Before Earnings in Alphabet Inc



Alphabet Inc (NASDAQ:GOOGL) : Avoid Bear Market Risk: The Secret to Option Trading Before Earnings

Date Published:

Disclaimer
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.


Preface
With the market's direction becoming tenuous, we can explore option trading opportunities in Alphabet Inc (NASDAQ:GOOGL) that do not rely on stock direction. It turns out, over the long-run, for stocks with certain tendencies like Alphabet Inc, there is a clever way to trade market anxiety or market optimism before earnings announcements with options.



The Trade Before Earnings
What a trader wants to do is to see the results of buying an at the money straddle a few days before earnings, and then sell that straddle just before earnings. The goal is to benefit from a unique and very short time frame when the stock might move 'a lot', either due to earnings anxiety (stock drops before earnings) or earnings optimism (stock rises before earnings), but taking no actual earnings risk. Here is the setup:



We are testing opening the position 7 calendar days before earnings and then closing the position 1 day before earnings. This is not making any earnings bet. This is not making any stock direction bet.

Once we apply that simple rule to our back-test, we run it on an at-the-money straddle:

Returns
If we did this long at-the-money (also called '50-delta') straddle in Alphabet Inc (NASDAQ:GOOGL) over the last three-years but only held it before earnings we get these results:

GOOGL
Long At-the-Money Straddle

% Wins: 58.33%
Wins: 7 Losses: 5
% Return:  70.6% 
% Annualized:  429.5% 

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 70.6% return, testing this over the last 12 earnings dates in Alphabet Inc. That's a total of just 60 days (5 days for each earnings date, over 12 earnings dates). That's an annualized rate of 429.5%.

We can also see that this strategy hasn't been a winner all the time, rather it has won 7 times and lost 5 times, for a 58% win-rate and again, that 70.6% return in less than two-full months of trading.


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Call Stack
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Setting Expectations
While this strategy has an overall return of 70.6%, the trade details keep us in bounds with expectations:
      The average percent return per trade was 7.99%.


Option Trading in the Last Year
We can also look at the last year of earnings releases and examine the results:

GOOGL
Long At-the-Money Straddle

% Wins: 75.00%
Wins: 3 Losses: 1
% Return:  32.6% 
% Annualized:  595.0% 

In the latest year this pre-earnings option trade has 3 wins and lost 1 times and returned 32.6%.
      Over just the last year, the average percent return per trade was 8.67%.



WHAT HAPPENED
This is it -- this is how people profit from the option market -- finding trading opportunities that avoid earnings risk and work equally well during a bull or bear market.

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.