Short-term Option Swing Trade Ahead of Earnings in Ferrari N.V.
Ferrari N.V. (NYSE:RACE) : Short-term Option Swing Trade Ahead of Earnings
Date Published: 2018-04-30Disclaimer
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.
PREFACE
There is a pattern of bullish momentum in Ferrari N.V. (NYSE:RACE) stock just days before earnings, and we can track that by looking at swing returns in the option market.
Even further, RACE has consistently shown pre-earnings momentum stock rallies, and it had a large earnings move higher last time. We have empirical data that suggests a large earnings move in the prior quarter, has led to more consistent pre-earnings momentum into the next pre-earnings cycle. Here is a stock chart over the last year:
We have highlighted the last earnings gap up for clarity. The next earnings date for RACE is 5-3-2018, so three-days before then would 4-30-2018 near the market close.
The Short-term Option Swing Trade Ahead of Earnings in Ferrari N.V.
We will examine the outcome of going long a weekly call option in Ferrari N.V. just three trading days before earnings and selling the call one day before the actual news.
This is construct of the trade, noting that the short-term trade closes before earnings and therefore does not take a position on the earnings result.
RISK MANAGEMENT
We can add another layer of risk management to the back-test by instituting and 40% stop loss and a 40% 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 or down 40% relative to the open price. If it was, the trade was closed.
RESULTS
Below we present the back-test stats over the last two-years in Ferrari N.V.:
| RACE: Long 40 Delta Call | |||
| % Wins: | 86% | ||
| Wins: 6 | Losses: 1 | ||
| % Return: | 447.7% | ||
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).
Track this trade idea. Get alerted for ticker `RACE` 3 days before earnings
We see a 447.7% return, testing this over the last 7 earnings dates in Ferrari N.V.. That's a total of just 14 days (2-day holding period for each earnings date, over 7 earnings dates).
Setting Expectations
While this strategy has an overall return of 447.7%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 39.7%.
➡ The average percent return per winning trade was 47.5%.
➡ The percent return for the losing winning trade was -7.1%.
WHAT HAPPENED
Bull markets tend to create optimism, whether it's deserved or not. 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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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.