Baozun Inc (NASDAQ:BZUN) : The One-Week Pre-earnings Momentum Trade With OptionsDate Published: 2018-05-07
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.
The bullish momentum pattern in Baozun Inc (NASDAQ:BZUN) stock 7 calendar days before earnings has yielded a back-test with eight straight wins over the last two-years with zero losses.
As the market has re-discovered, for now, its bullish legs, we have focused a little more on directional back-tests. Today we focus on one more before going back to non-directional empirical results. Baozun in known well to CML Pro members as the pick-axe the China's massive e-commerce revolution, with backing from the "China's Amazon," Alibaba.
Here is an one-year stock chart with the earnings dates denoted by the green "E" icon. Note the bullish pattern one week before the events. You can get this chart on www.CMLviz.com by adjusting the settings window:
And now the stock chart:
Even further, and perhaps most importantly, the second pattern comes in when we note that the stock move off of the last earnings announcement was a gap up. We have empirical evidence that large stock moves up from earnings in the prior quarter, yield statistically significantly more bullish momentum in the next pe-earnings run-up.
According to our data provider, Wall Street Horizon, BZUN has earnings due out on 5-16-2018, but that date is not confirmed. They have yet to announce a date officially.
The Bullish Option Trade Before Earnings in Baozun Inc
We will examine the outcome of getting long a weekly call option in Baozun Inc 7-days before earnings (using calendar days) and selling the call before the earnings announcement. The company announces before the bell, so the back-test must close the call "one-day before earnings" to avoid earnings risk.
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 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 Baozun Inc using a weekly option with the at the money (50 delta) call:
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 541% return, testing this over the last 8 earnings dates in Baozun Inc.
While this strategy had an overall return of 541%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 61.2% over each 7-day period.
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.
Even further, we have empirical data that shows that a large stock move up off of the prior earnings result does show stronger bullish momentum into the next pre-earnings run.
Bull markets tend to create optimism, whether it's deserved or not. That optimism tends to be larger and occur more often in the pre-earnings run if the prior earnings release resulted in a large stock move higher. To see how to find the best performing historical momentum, technical analysis or non-directional trades 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.