If Baidu Rips Off of Earnings -- An Aggressive Momentum Window May Open Up
Date Published: 2018-09-26
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.
LEDEThe Big three Chinese tech companies have been caught in the trade war cross hairs, but Baidu has an interesting position -- it is primarily an advertising driven business and it is insular to China. So, tariffs wouldn't directly impact the company perhaps as much as others.
With that in mind, we will investigate a bullish momentum pattern in Baidu Inc (NASDAQ:BIDU) stock 1 trading day after earnings, if and only if the stock showed a large gap up after the actual earnings announcement. It has resulted in a short-window after the earnings beat that where the stock has rallied higher, and rather abruptly. Here is a chart of the phenomenon, generally:
Baidu Inc (NASDAQ:BIDU) EarningsIn Baidu Inc, if the stock move immediately following an earnings result was large (3% or more to the upside), if we test waiting one-day after that earnings announcement and then bought a three-week out of the money (40 delta) call, the results were quite strong.
This back-test opens one-day after earnings were announced to try to find a stock that continues an upward trajectory after an earnings rally.
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 out-of-the-money call one-trading day after earnings.
* Close the long call 14 calendar days after earnings.
* Use the options closest to 21 days from expiration (but more than 14 days).
This is a straight down the middle direction trade -- this back-test wins if the stock 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.
RISK CONTROLSince blindly owning calls 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 call 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 a stock rally early in the two-week period rather than waiting to close 14-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 call in Baidu Inc (NASDAQ:BIDU) over the last three-years but only held it after earnings and after an earnings pop higher, 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).
Looking at AveragesThe overall return was 314%; but the trade statistics tell us more with average trade results:
➡ The average return per trade was 48.2% over each 13-day period.
➡ The average return per winning trade was 73.2% over each 13-day period.
➡ The average return per losing trade was -76.5% over each 13-day period.
The Last YearThis has triggered twice in the last year, both resulting in winning trades.
Here are those two trades and results, down to all of the details.
We can see the first trigger actually lasted just one day -- there was a second gap up that turned into a 116% gain.
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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.