Applied Materials

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Applied Materials: The One-Week and One-Day Pre-earnings Momentum Trade

Applied Materials Inc (NASDAQ:AMAT) : The One-Week and One-Day Pre-earnings Momentum Trade

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.

There is a bullish momentum pattern in Applied Materials Inc (NASDAQ:AMAT) stock 6 calendar days before earnings, and also an one-day pre-earnings, and we can capture both phenomena explicitly by looking at returns in the option market.

As of now, the next earnings date for AMAT is estimated to be 5-17-2018. That is not a verified date yet, so any attempt to reenact the back-test must wait until the actual date is released.

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 the one-week before an earnings date. This can be especially true of the tech stocks that have led the bull market, and AMAT qualifies.

The Bullish Option Trade Before Earnings in Applied Materials Inc
We will examine the outcome of getting long a weekly call option in Applied Materials Inc 6-days before earnings (using calendar days) and selling the call before the earnings announcement.

Here's the set-up in great clarity; again, note that the trade closes zero before earnings, but because AMAT reports after the market closes, 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 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.

Here are the results over the last two-years in Applied Materials Inc:

AMAT: Long 40 Delta Call

% Wins: 87.5%
Wins: 7 Losses: 1
% Return:  588% 

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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Setting Expectations
While this strategy had an overall return of 588%, the trade details keep us in bounds with expectations:

      The average percent return per trade was 42% over seven days.
      The average percent return per winning trade was 51% over seven days.
      The percent return for the losing trade was -21% over seven days.

Another interesting point to note is that unlike many of these other momentum back-tests, the day of the event does in fact have bullish momentum as well, so often times this trade has turned positive waiting until the last possible day.

In fact, the results are so large we share that one-day back-test over the last two pre-earnings periods below:

AMAT: Long 40 Delta Call

% Wins: 100%
Wins: 2 Losses: 0
% Return:  212% 

Tap Here to See the Back-test

The average return over the last two pre-earnings periods just the day before earnings (an one-day trade / overnight trade) averaged 102.9% per day and both trades have right about the same results -- so this isn't the case of one huge result and then one small result which make the average non-representative. Again, this back-test does not take earnings risk.

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.

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:
Tap Here to See the Tools at Work

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.