Red Hat Inc (NYSE:RHT) : Right After Earnings, The Intelligent Options TradeDate Published: 2018-02-7
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.
This is a simple option trade that starts two-days after Red Hat Inc (NYSE:RHT) earnings and lasts for the one month to follow, that has been a winner for 3 straight years.
Red Hat Inc (NYSE:RHT) 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 Red Hat 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:
* Open short put spread 2-days after earnings
* Close short put spread 29 days later
* Use the 30-day options
If we sold this 30/10 delta out-of-the-money put spread in Red Hat Inc (NYSE:RHT) over the last three-years but only held it after earnings we get these results:
We see a 68% return, testing this over the last 12 earnings dates in Red Hat 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 11 times and lost 1 times, for a 92% win-rate.
While this strategy had an overall return of 68%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 7.9% 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 Red Hat 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 Red Hat Inc (NYSE:RHT) .
We can see that this idea has been a winner more times than it has been a loser -- a 92% win-rate. It's that positive win-rate that has created that large 74% annualized return.
Traders that have a plan guess less. This is how people profit from the option market. Take a reasonable idea or hypothesis, test it, and apply lessons learned.