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Short Bursts of Risk Exposure In Options Create Opportunity in Urban Outfitters Inc

Urban Outfitters Inc (NASDAQ:URBN) : Avoid Bear Market Risk: The Secret to 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 Urban Outfitters Inc (NASDAQ:URBN) that do not rely on stock direction. Over both the most recent bull market and the last bear market from 2007-2008, for stocks with certain tendencies, there has been a shrewd approach to trading pre-earnings volatility with options.

The goal is to find trades that expose risk in short-bursts of time, with out-sized historical gains relative to historical losses.

The Trade Before Earnings in Urban Outfitters Inc
Let's examine the results of getting long a weekly at the money straddle 4-calendar days days before earnings, and then sell out of that position on the day of earnings but before the actual earnings release.

URBN has earnings due out on 3-6-2018 after the market closes, according to our earnings data provider Wall Street Horizon. 4-days before then would be 3-2-2018. near the market close.

Here is the setup:

We are testing opening the position 4 calendar days pre-earnings event and then closing the straddle the day of earnings which is before event. 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:

We found this trade using the Trade Machine Pro™ SCanner, using the S&P 500 as our ticker group and the "4 Days Pre-earnings Long Straddle," as the strategy:

We then adjusted the days before earnings to "0," since URBN reports after the close.

If we did this long at-the-money (also called '50-delta') straddle (using the options closest to one-week in expiration) in Urban Outfitters Inc (NASDAQ:URBN) 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:  249% 

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).

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The results show a 249% return, testing this over the last 12 earnings dates in Urban Outfitters Inc. That's a total of just 48 days (4 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 9 times, for a 75% win-rate

Setting Expectations
This is the critical part, right here -- why short-bursts of risk exposure present a worthy examination.

While this strategy has an overall return of 248%, the trade details keep us in bounds with expectations:

      The average percent return per trade was 27.9% over 4-days.
      The average percent return per winning trade was 39.1% over 4-days.
      The average percent return per losing trade was -5.6% over 4-days.

It's that risk to reward dynamic that this back-test is after.

Tested Across Bull and Bear Markets
While many times we can identify strategies that work during a bull or a bear market, this strategy, when we tested it empirically, worked during both. Here are the specifics:

Using the Nasdaq 100 and the Dow 30 as our study group, here are the average total returns by stock for the bull market from 2012-2018 (January) and 2007-2009, which includes the bear market, and the wild 2009 -- where the S&P 500 bottomed in March and then ripped higher -- in other words, a highly volatile time in the market.

As a quick reminder, here is the 2007-2009 period for the S&P 500:

Time Period Return by Stock
2012-2018 (January) +40%
2007-2009 +21%

Since we are looking at total returns, it turns out those time periods show nearly identical results (2012-2018 was six-years and 2007-2009 was three-years). Yet more impressive, the strategy showed a 57% win rate by stock during the wildly volatile 2007-2009 market.

These results are empirical, which is to say, they are objective. We are not inserting opinion.

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 that show risk exposure in short-bursts of time.

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.