Alphabet Inc (NSDQ:GOOG) : Trading Earnings Optimism With Options
Date Published: 2018-11-7
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.
PrefaceThere is a powerful pattern of optimism and momentum in Alphabet Inc (NSDQ:GOOG) stock right before of earnings, and we can capture that pattern by looking at returns in the option market. The strategy won't work forever, but for now it is a momentum play that has not only returned 1,327% annualized returns, but has also shown a high win-rate of 83%.
PREMISEThe 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. Now we can see it in Alphabet Inc.
The Options Optimism Trade Before Earnings in Alphabet IncLet's look at the results of buying a monthly call option in Alphabet Inc two-weeks 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.
The mechanics of the TradeMachine® are that it uses end of day prices for every back-test entry and exit (every trigger).
We see a 610.9% return, testing this over the last 12 earnings dates in Alphabet Inc. That's a total of just 168 days (14 days for each earnings date, over 12 earnings dates). That's an annualized rate of 1,327%. That's the power of following the trend of optimism into earnings -- and never even worrying about the actual earnings result.
We can also see that this strategy hasn't been a winner all the time, rather it has won 10 times and lost 2 times, for a 83% win-rate and again, that 610.9% return in less than six-full months of trading. The trade will lose sometimes, but over the most recent trading history, this momentum and optimism options trade has won ahead of earnings.
Setting ExpectationsWhile this strategy had an overall return of 610.9%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 59.99%.
Checking More Time Periods in Alphabet IncNow we can look at just the last year as well:
We're now looking at 172.7% returns, on 3 winning trades and 1 losing trades. It's worth noting again that we are only talking about two-weeks of trading for each earnings release, so this is 172.7% in just 8-weeks of total trading which annualizes to 1,126%.
➡ The average percent return over the last year per trade was 43.52%.
WHAT HAPPENEDBull markets have quirks, or personalities if you like.
The 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 Alphabet Inc.
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.