Dave & Buster's Entertainment Inc (NASDAQ:PLAY) : The One-Week Pre-earnings Momentum Trade With Options
Date Published: 2018-08-19
DisclaimerThe 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.
PrefaceDave & Buster's Entertainment Inc (NASDAQ:PLAY) has had 14 earnings releases since being a public company. For all 14 of the pre-earnings run-ups, owning a long call has been a winner -- with zero losses.
The next earnings release date has been confirmed by the company for 9-14-2018. Sevenbefore than wouldbe 9-7-2018.
The Bullish Option Trade Before Earnings in Dave & Buster's Entertainment IncWe will examine the outcome of getting long a weekly out of the money (40 delta) call option in Dave & Buster's Entertainment Inc 7-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 before earnings, so this trade does not make a bet on the earnings result.
RISK MANAGEMENTWe 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.
RESULTSHere are the results over the last three and a half years, which encapsulates the entire history of Dave & Buster's Entertainment Inc stock:
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).
This is not a magic bullet, rather it's a bullish strategy. In the short-term it hasn't seen any losses, but more importantly, whether or not it loses on any given earnings run-up, the 473% return in less than three-full months of trading is predicated on an idea of consistent momentum.
Setting ExpectationsWhile this strategy had an overall return of 473%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 52.3%.
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.
Back-testing More Time Periods in Dave & Buster's Entertainment Inc
Now we can look at just the last year as well:
We're now looking at 208% returns, on 4 winning trades and 0 losing trades.
➡ The average percent return over the last year per trade was 58.6%.
WHAT HAPPENEDBullish momentum and sentiment ahead of earnings has been, empirically, a repeating pattern both in a bull and bear market for some companies. This is just one example of what has become a tradable phenomenon in Dave & Buster's Entertainment Inc.
In a few mouse clicks and about 30 seconds, we identified a pattern that has repeatedly turned a profit over and over again. Tap Here, See for Yourself
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.