NVIDIA Corporation (NASDAQ:NVDA) : Trading Momentum into Earnings Optimism With Options
Date Published: 2018-10-01
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.
PrefaceThe pattern of optimism right before earnings has been strong in technology -- and it has persisted throughout even the bear market in 2007-2009. But with Nvidia, the results are simply staggering.
PREMISEWhile Nvidia has suddenly been hit by a wave of selling, along with the broader market, its next earnings date is 11-15-2018, after the market closes. 14-days before then, 11-1-2018, may be the time to get bullish again.
The premise is simple -- one of the least recognized but most important phenomena surrounding this bull market is the amount of optimism, or upward momentum, that sets in the two-weeks before an earnings announcement.
Let's look at the results of buying a slightly out of the money call (40 delta) as close as possible to 3-weeks from expiration in NVIDIA Corporation the 14-days (calendar days) before earnings 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.
Now, unlike many of our other set-ups, this is in fact a straight down the middle bullish bet -- this absolutely takes on directional stock risk, so let's be conscious of that before we see the results, because they are mind bending.
Here are the results over the last two-years in NVIDIA Corporation:
The mechanics of the TradeMachine® are that it uses end of day prices for every back-test entry and exit (every trigger).
Setting ExpectationsWhile this strategy had an overall return of 521%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 45.8%.
➡ The average percent return per winning trade was 55.5%.
➡ The percent return for the losing trade was -22.6%.
Checking The Great RecessionWe can now look from the top of the market in 2007 to the bottom of the market in 2009. And this, is incredible.
In that short-time period, Nvidia stock was utterly crushed, losing 71% of its value. Here is a stock chart:
But, during that same period where Nvidia was cut to one quarter of its original value, here is how the pre-earnings momentum strategy did:
While Nvidia stock dropped 71%, the pre-earnings momentum trade was up 39%.
WHAT HAPPENEDThe personality of this bull market is one that shows optimism before earnings -- irrespective of the actual earnings result. That has been a tradable phenomenon in a number of liquid technology companies. Find the rest.
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You should read the Characteristics and Risks of Standardized Options.
Past performance is not an indication of future results.
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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.