SPX
2,984.42
-19.62 (-0.65%)
-0.42%
-0.49%
VIX
14.25
+0.28 (+2.00%)

Right After Earnings, The Intelligent Options Trade in L-3 Communications Holdings Inc



L-3 Communications Holdings Inc (NYSE:LLL) : Right After Earnings, The Intelligent Options Trade

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.


LEDE
This is a simple option trade that starts two-days after L-3 Communications Holdings Inc (NYSE:LLL) earnings and lasts for the one month to follow, that has been a winner for 3 straight years.



L-3 Communications Holdings Inc (NYSE:LLL) Earnings
While the mainstream media likes to focus on the actual earnings move for a stock, that's the distraction when it comes to the option market.

For L-3 Communications Holdings Inc, irrespective of whether the earnings move was up or down, if we waited two calendar days after the stock move, and then sold a one-month out of the money put spread, the results were simply staggering. We use two-days to allow the stock to fully reach equilibrium post earnings.

We can examine this intelligent approach, objectively, with a custom option back-test. Here is our earnings set-up:



Rules
* Open short put spread 2-days after earnings
* Close short put spread 29 days later
* Use the 30-day options

RETURNS
If we sold this 30/10 delta out-of-the-money put spread in L-3 Communications Holdings Inc (NYSE:LLL) over the last three-years but only held it after earnings we get these results:

LLL: Short
30 Delta / 10 Delta
Put Spread

% Wins: 75%
Wins: 9 Losses: 3
% Return:  46.1% 
% Annualized:  50% 

Tap Here to See the Back-test




Track this trade idea. Get alerted for ticker `LLL`  2 days after earnings

Ticker

 
Email

 
Phone
(optional for text alerts)
 

 

A free service courtesy of cmlviz.com


We see a 46.1% return, testing this over the last 12 earnings dates in L-3 Communications Holdings Inc. That's a total of just 336 days (28 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.


Setting Expectations
While this strategy had an overall return of 46.1%, the trade details keep us in bounds with expectations:
      The average percent return per trade was 3.94% in just 27-calendar days.

MORE TO IT THAN MEETS THE EYE
While a short put spread is a strategy that gains profits if the underlying stock "doesn't go down a lot," there is more to this with L-3 Communications Holdings Inc.

What we're after with this approach is identifying companies that make their large stock move the day after earnings -- whether that's up or down -- and after that, find a sense of equilibrium in the stock price for the next month. This is what we find in L-3 Communications Holdings Inc (NYSE:LLL) .

We can see that this idea has been a winner more times than it has been a loser -- a 75% win-rate. It's that positive win-rate that has created that large 50% annualized return.

WHAT HAPPENED
This is it -- this is how people profit from the option market -- it's not about guessing; ever.