VIVUS Inc (NSDQ:VVUS) : How to Trade VIVUS Inc Momentum After an Earnings Gap Drop
Date Published: 2019-01-12
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.
LEDEThere is a bearish momentum pattern in VIVUS Inc (NSDQ:VVUS) stock 1 trading day after earnings, if and only if the stock showed a large gap down after the actual earnings announcement.
This is a conditional entry -- the company reports earnings and if the stock move off of that report is a 3% loss or larger, then a bearish position is back-tested looking for continuing downward momentum. The event is rare, but when it has occurred, the back-test results are noteworthy.
VIVUS Inc (NSDQ:VVUS) Earnings
In VIVUS Inc, if the stock move immediately following an earnings result was a large drop (3% or more to the downside), when we test waiting one-day after that earnings announcement and then bought a three-week at the money (50 delta) put, the results were quite strong.
This back-test opens one-day after earnings were announced to try to find a stock that continues a downward spiral after an earnings gap down.
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% loss or more in the underlying, then, follow these rules:
* Open the long at-the-money put one-trading day after earnings.
* Close the long put 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 a downward trajectory after a large earnings move the two-weeks following earnings and it will stand to lose if the stock rises, instead. 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 CONTROLSince blindly owning put 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 put 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 decline 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.
Here are the results of a long at-the-money put in VIVUS Inc (NSDQ:VVUS) over the last three-years but only initiated after earnings if the stock dropped by 3% or more:
The mechanics of the TradeMachine® are that it uses end of day prices for every back-test entry and exit (every trigger).
Looking at AveragesThe overall return was 60.1%; but the trade statistics tell us more with average trade results:
➡ The average return per trade was 44.3% over each 13-day period.
➡ The average return per winning trade was 104.1% over each 13-day period.
➡ The average return per losing trade was -45.4% over each 13-day period.
WHAT HAPPENEDBearish momentum and sentiment after earnings can be quite powerful with the tailwind of an earnings miss.
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.