Momo Inc (NASDAQ:MOMO) : The Repeating Pattern in Momo Inc That Triggers Right After an Earnings Beat and The Option Trade That Follows
Date Published: 2018-11-23
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.
LEDEEven in a bear market, there are times that a bullish trigger may have veracity. It takes a combination of several phenomena, but those may be converging in Momo Inc (NASDAQ:MOMO), right now.
This is a conditional entry -- the company reports earnings and if the stock move off of that report is a 3% gain or larger, then a bullish position is back-tested looking for continuing momentum in a short window to follow. The event is rare, but when it has occurred, the back-test results are noteworthy.
Momo Inc (NASDAQ:MOMO) EarningsMomo Inc. operates as a mobile-based social networking platform in the People's Republic of China, and its stock has been hammered. Here is a chart over the last year, note the moves off of positive earnings news and the rather glaring large stock drop in the last several months.
That stock chart isn't dissimilar to many tech stocks, especially those in China. But here's where Momo has some uniqueness to its story. The company has been reporting all time highs in revenue and net income (after tax earnings). Here is a chart of those two metrics:
As that has happened, analyst expectations have not come in that much. Below we focus on two metrics. In the top half we see that Wall Street analysts still project 30% annual growth in next fiscal year. In the bottom we see that all of that growth with a plunging stock price has left the company with a forward P/E ratio of 10.
These are two of the converging phenomena we need. The last one is an earnings beat.
Momo Inc (NASDAQ:MOMO) Back-testWe have no interest in making an earnings speculation -- for all we know, MOMO could miss badly, or it could beat and still go down. This is what we want:
In Momo 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 slightly out of the money call (40 delta), 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.
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 at-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 trade wins if the stock is 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.
But, this is a conditional back-test, which is to say, it only Triggers if an event before it occurs.
RISK CONTROLWe 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 at-the-money call in Momo Inc (NASDAQ:MOMO) over the last 9 months 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 285%; but the trade statistics tell us more with average trade results:
➡ The average return per trade was 88% over each 13-day period.
WHAT HAPPENEDThis hard downturn in the market is a rare opportunity for option investors. See the trade that has been working, exactly this October and November, right now:
Tap Here, See for Yourself
You should read the Characteristics and Risks of Standardized Options.
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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.