Shopify Inc

Shopify Inc (NYSE:SHOP) : The Momentum Pattern in Shopify Inc that Follows Right After an Earnings Gap Rip

LEDE

Anytime a market feels over bought or over sold, it can be a helpful exercise to wait for directional momentum confirmation, before entering a trade. We test this with Shopify Inc (NYSE:SHOP) in this article.

This back-test waits one 1 trading day after earnings and opens a monthly at the money (50 delta) call option, if and only if the stock showed a large gap up after the actual earnings announcement.

This is a conditional entry -- the company reports earnings and if the stock move off of that report is a 3% gain or larger, then a bullish position is back-tested looking for continuing momentum. The event is rare, so rare in fact that it last triggered a year ago, but when it has occurred, the back-test results are noteworthy.

Shopify Inc (NYSE:SHOP) Earnings

Simply owning options after earnings, blindly, is likely not a good trade, but hand-picking the times and the stocks to do it in can be useful. We can test this approach without bias with a custom option back-test. Here is the timing set-up around earnings:

Rules

* Condition: Wait for the one-day stock move off of earnings, and if it shows a 3% gain or more in the underlying, then, follow these rules:
* Open the long at-the-money call one-trading day after earnings.
* Close the long call 28 calendar days after earnings.
* Use the options closest to 30 days from expiration (but more than 28 days).

This is a straight down the middle direction trade -- this trade wins if the stock is continues on an upward trajectory after a large earnings move the two-weeks following earnings and it will stand to lose if the stock does not rise. This is not a silver bullet -- it's a trade that needs to be carefully examined.

But, this is a conditional back-test, which is to say, it only triggers if an event before it occurs.

RISK CONTROL

Since blindly owning calls can be a quick way to lose in the option market, we will apply a risk control to this analysis as well. We will add a 75% stop loss and a 75% limit gain.

In English, at the close of every trading day, if the call is up 75% from the price at the start of the trade, it gets sold for a profit. If it is down 75%, it gets sold for a loss. This also has the benefit of taking profits if there is a stock rally early in the month long period rather than waiting to close 28-days later.

RESULTS

If we bought the at-the-money call in Shopify Inc (NYSE:SHOP) over the last three-years but only held it after earnings and after an earnings pop higher, we get these results:

SHOP Long 50 Delta Call
% Wins:		85.7%
Wins: 6		Losses: 1
% Return:		298%

Tap Here to See the Back-test

The mechanics of the TradeMachine® Stock Option Backtester are that it uses end of day prices for every back-test entry and exit (every trigger).

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Looking at Averages

The overall return was 298%; but the trade statistics tell us more with average trade results:
      ➡ The average return per trade was 57.7% over each 28-day period.
      ➡ The average return per winning trade was 80.3% over each 28-day period.
      ➡ The average return per losing trade was -77.9% over each 28-day period.

WHAT HAPPENED

Bullish momentum and sentiment after earnings can be quite powerful with the tailwind of an earnings beat. To learn more watch the first 70 seconds of the video on the page below -- that alone could change your view of trading, forever:
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.