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The Kingpin: Microsoft's One-Week Pre-earnings Momentum Trade

Microsoft Corporation (NASDAQ:MSFT) : 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.

There is one pattern that has been so consistent for so long that it stands on its own -- and it belongs to Microsoft Corporation (NASDAQ:MSFT).

As the bull market has propelled higher so to has the pre-earnings momentum pattens. We have seen continual patterns play out in so many tech names that we have highlighted -- just this January alone in INFY, ASML, LRCX. Today we look at the kingpin of them all.

Microsoft has earnings due out on 1-31-2018 after the market closes and one-week before then would be 1-24-2018 at the market close.

We must address a note of caution. With the market rising so far so fast and a back-test that looks so good, it can be easy to make more of a result than should be. This is a historical pattern that has continued, but there is no sure thing in finance, ever. Now, let's get to the remarkable results.

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 Microsoft Corporation.

The Bullish Option Trade Before Earnings in Microsoft Corporation
We will examine the outcome of getting long a weekly call option in Microsoft Corporation 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.

Here are the results over the last three and a half years in Microsoft Corporation:

MSFT: Long 40 Delta Call

% Wins: 100%
Wins: 14 Losses: 0
% Return:  1340% 

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 1340% return, testing this over the last 14 earnings dates in Microsoft Corporation. That's a total of just 98 days (7-days for each earnings date, over 14 earnings dates). This has been the results of following the trend of bullish sentiment into earnings while avoiding the actual earnings result.

Although it may seem so, this is not a magic 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 1340%  return in less than four-full months of trading is predicated on an idea of consistent momentum.

Setting Expectations
While this strategy had an overall return of 91340%, the trade details keep us in bounds with expectations:
      The average percent return per trade was 63.40%.

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

MSFT: Long 40 Delta Call

% Wins: 100.00%
Wins: 4 Losses: 0
% Return:  197.9% 

Tap Here to See the Back-test

      The average percent return over the last year per trade was 52.3%.

Bull markets tend to create optimism, whether it's deserved or not. To see how to find the best performing historical momentum, technical analysis or non-directional trades for any stock using empirical results rather than guesses, 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.