Teva Pharmaceutical Industries Ltd

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Avoid Bear Market Risk: Option Trading Before Earnings in Teva Pharmaceutical Industries Limited

Teva Pharmaceutical Industries Limited (NYSE:TEVA) : Avoid Bear Market Risk: Option Trading 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.

With the market's direction becoming tenuous, we can explore option trading opportunities in Teva Pharmaceutical Industries Limited (NYSE:TEVA) that do not rely on stock direction.

When we see a market like this one, where it appears there is finally some selling and the moves are getting abrupt, we look for back-tests that not only are stock direction agnostic, but also have average win returns to average loss returns that are outsized.

As we will see, in this case we have a strategy where the average winning trade was a 50% return, but the average losing trade was just -5%. That's 10:1. This is why you have Trade Machine, to manage the uncertainty, and manage it well.

According to our earnings date data provider, Wall Street Horizon, Teva has earnings due out on 2-8-2018 before the market opens. 7-days before then would be Thursday, 2-1-2018 near the close of the day.

The Trade Before Earnings
What a trader wants to do is to see the results of buying an at the money straddle a 7 days before earnings, and then sell that straddle just before earnings. In this case, we test using the options that are closest to 14-days from expiration. 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:

As always, we discovered this back-test using the Trade Machine Pro scanner. We looked at the S&P 500 and then the "7-days pre-earnings long straddle."

If we did this long at-the-money (also called '50-delta') straddle in Teva Pharmaceutical Industries Limited (NYSE:TEVA), using the options closest to 14-days to expiration, over the last three-years but only held it before earnings we get these results:

Long At-the-Money Straddle

% Wins: 75%
Wins: 9 Losses: 3
% Return:  378% 

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 378% return, testing this over the last 12 earnings dates in Teva Pharmaceutical Industries Limited. That's a total of just 84 days (7 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 9 times and lost 3 times, for a 75% win-rate and again, that 378% return in less than three-full months of trading.

Setting Expectations
While this strategy has an overall return of 378%, the trade details keep us in bounds with expectations:

      The average percent return per trade was 36% over one week.
      The average percent return per winning trade was 49.5% over one week.
      The average percent return per losing trade was -4.5% over one week.

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

Long At-the-Money Straddle

% Wins: 100.00%
Wins: 4 Losses: 0
% Return:  79.2% 

In the latest year this pre-earnings option trade has 4 wins and lost 0 times and returned 41.3%.
      Over just the last year, the average percent return per trade was 20.5% over one week.

We don't always have to look at bullish back-tests in a bull market -- sometimes a straight down the middle volatility pattern pops up. 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.

To see how to do this for any stock we welcome you to watch this quick demonstration video:
Tap Here to See the Tools at Work

Thanks for reading.

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.