Apple (NASDAQ:AAPL) : The One-Month Pre-earnings Momentum Trade With OptionsDate Published: 2018-04-5
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 a bullish momentum pattern in Apple (NASDAQ:AAPL) stock 25 calendar days before earnings, and we can capture that phenomenon explicitly by looking at returns in the option market.
According to our earnings date provider, Wall Street Horizon, Apple has earnings due out on 5-1-2018, after the market closes. 25 days before then would be 4-6-2018.
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 before an earnings date.
That is, totally irrespective of the reality that follows -- that is, independent of whether the stocks have a history of actually rising after earnings. There has been a way to profit from this pattern without taking any formal earnings risk in Apple Inc.
The Bullish Option Trade Before Earnings in Apple Inc
We will examine the outcome of getting long a monthly call option (which has the earnings date in the expiry) in Apple Inc 25-days before earnings (using calendar days) and selling the call before the earnings announcement but on that day.
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 75% stop loss and a 50% 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 50% or down 75% relative to the open price. If it was, the trade was closed.
Here are the results over the last three-years in Apple Inc:
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 411% return, testing this over the last 12 earnings dates in Apple Inc.
The trade will lose sometimes, but over the most recent trading history, this momentum and optimism options trade has won ahead of earnings.
While this strategy had an overall return of 411%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 41.6%.
➡ The average percent return per winning trade was 65.4%.
➡ The average percent return per losing trade was -77.3%.
We do note that the losses did in fact hit the limits -- so a loss hurt, no doubt. We also note that the stock price didn't just go straight up, it was a winding path, but ultimately it was decidedly up for the overwhelming majority of the time.
RESULTS - THE LAST YEAR
Here are the results over the last year in Apple Inc:
Is This Just Because Of a Bull Market?
It's a fair question to ask if these returns are simply a reflection of a bull market rather than a successful strategy. It turns out that this phenomenon of pre-earnings optimism also worked very well during 2007-2008, when the S&P 500 collapsed into the "Great Recession."
The average return for this strategy, by stock, using the Nasdaq 100 and Dow 30 as the study group, saw a 45.3% return over those 2-years. And, of course, these are just 8 trades per stock, each lasting 7 days.
* Yes. We are empirical.
* Yes, you are better than the rest now that you know this.
* Yes, you are powerful for it.
We are after answers that are empirical, objective, and explicit in order to find repeatable strategies and patterns that produce successful trades over and over again. 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:
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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.