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Momo Inc (NASDAQ:MOMO) : Swing Trade Earnings Bullish Momentum After an Earnings Beat

Momo Inc (NASDAQ:MOMO) : Swing Trade Earnings Bullish Momentum After an Earnings Beat

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 pattern of bullish momentum in Momo Inc (NASDAQ:MOMO) stock just days before earnings, and we can track that by looking at swing returns in the option market.

Even further, when MOMO showed a large stock move off of the last earnings result (the prior quarter), the win rate and return per trade has been higher. This is exactly the situation we face now -- MOMO rose 9% off of the prior earnings report -- now we face a back-test with coinciding patterns.

Here is an one-year chart for MOMO, where the green "E" icons represent earnings -- see the last earnings move.

According to our data provider, Wall Street Horizon, MOMO has earnings due out on 5-29-2018, which is a Tuesday. The back-tester handles earnings on Monday or Tuesday with 3-days before earnings a little differently -- in this case it uses trading days. In English, 3-trading days before 5-29-2018 is Thursday, 5-24-2018.

The Short-term Option Swing Trade Ahead of Earnings in Momo Inc
We will examine the outcome of going long an at the money (50 delta) weekly call option in Momo Inc 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.

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.

Below we present the back-test stats over the last two-years in Momo Inc:

MOMO: Long 50 Delta Call

% Wins: 75%
Wins: 6 Losses: 2
% Return:  310% 

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 has an overall return of 269.2%, the trade details keep us in bounds with expectations:

      The average percent return per trade was 36.6% over each three-day period.
      The average percent return per winning trade was 55.7% over each three-day period.
      The average percent return per losing trade was -20.7% over each three-day period.

Diving Deeper
We have empirical evidence that the move in the prior quarter off of earnings has a statistically significant impact on the next quarter's pre-earnings momentum. You can learn about that empirical research.

Since MOMO did in fact have an earnings move (+9%) that qualified as a "large move" let's see how the a pre-earnings call has done performed when the prior earnings move was up "large." Here is the added setting for that back-test:

So, we are looking over the last two-years, how a pre-earnings long call performed if the prior earnings move was great than a 5% up swing.

MOMO: Long 50 Delta Call
After Large Earnings Move

% Wins: 100%
Wins: 2 Losses: 0
% Return:  108% 

We're now looking at 108% returns on 2 trades.

There's a lot less luck to successful option trading than most people realize and this is it -- this is how people profit from the option market.

To find the best performing historical momentum, technical analysis or non-directional trades 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.