Salesforce.com Inc (NYSE:CRM) : The Volatility Option Trade After Earnings
Date Published: 2018-08-29
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.
LEDEThis is a slightly advanced option trade that bets on volatility for a period that starts one-day after Salesforce.com Inc (NYSE:CRM) earnings and lasts for the 14 calendar days to follow, that has been a winner for the last 2 years. We note the use of strict risk controls in this analysis.
Salesforce released earnings on 8-29-2018, and one-day after that would be 8-30-2018 at the end of the day.
Salesforce.com Inc (NYSE:CRM) EarningsIn Salesforce.com Inc, irrespective of whether the earnings move was large or small, if we waited one-day after earnings and then back-tested going long a slightly out of the money (40 delta) two-week strangle (using three-week options), the results were quite strong. This back-test opens one-day after earnings were announced, but at the end of the day, to try to find a stock that moves a lot after the earnings announcement.
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* Open the long out-of-the-money strangle one-calendar day after earnings.
* Close the strangle 14 calendar days after earnings.
* Use the options closest to 21 days from expiration (but more than 7 days).
This is a straight down the middle volatility bet -- this trade wins if the stock is volatile the week following earnings and it will stand to lose if the stock is not volatile. This is not a silver bullet -- it's a trade that needs to be carefully examined.
But, this is a stock direction neutral strategy, which is to say, it wins if the stock moves up or down -- it just has to move.
RISK CONTROLSince blindly owning volatility can be a quick way to lose in the option market, we will apply a tight risk control to this analysis as well. We will add a 40% stop loss and a 40% limit gain.
In English, at the close of every trading day, if the strangle is up 40% from the price at the start of the trade, it gets sold for a profit. If it is down 40%, it gets sold for a loss. This also has the benefit of taking profits if there is volatility early in the week rather than waiting to close 7-days later.
Another risk reducing move we made was to use 21-day options and only hold them for 14-days so the trade doesn't suffer from total premium decay.
RESULTSIf we bought the out-of-the-money strangle in Salesforce.com Inc (NYSE:CRM) over the last two-years but only held it after earnings we get these results:
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).
We see a 240% return, testing this over the last 7 earnings dates in Salesforce.com Inc. That's a total of just 98 days (14 days for each earnings date, over 7 earnings dates).
Looking at AveragesThe overall return was 240%; but the trade statistics tell us more with average trade results:
➡ The average return per trade was 32.8% over 14-days.
➡ The average return per winning trade was 58.7% over 14-days.
➡ The average return per losing trade was -31.9% over 14-days.
The Last YearWe can also look at the last year:
The overall return was 237%; but the trade statistics tell us more with average trade results:
➡ The average return per trade was 65.7% over 14-days.
WHAT HAPPENEDIn a few mouse clicks and about 30 seconds, we empirically identify a pattern that has repeatedly turned a profit over and over again, then displayed those results with no room for confusion or doubt. You can tap the link below to become your own option expert.
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.