Pre-earnings Momentum Trade With a Technical Trigger in Alphabet Inc
Alphabet Inc (NASDAQ:GOOGL) : Pre-earnings Momentum Trade With a Technical Trigger
Date Published: 2019-01-14
Disclaimer
The 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.Preface
There is a bullish momentum pattern in Alphabet Inc (NASDAQ:GOOGL) stock 14 calendar days before earnings. Further, we use moving averages as a safety valve to try to avoid opening a bullish position while a stock is in a technical break down, like the fourth quarter of 2018.According to our data provider Wall Street Horizon, the next GOOGL earnings are due out Next Earnings: 2019-02-04, after the market closes. 14 calendar days before then would be January 21st.
The Bullish Option Trade Before Earnings in Alphabet Inc
We will examine the outcome of getting long a monthly call option in Alphabet Inc 14-days before earnings (using calendar days) and selling the call before the earnings announcement if and only if the stock price is above the 50-day simple moving average.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.
And here is the technical requirement -- note only one is "turned on," and that is the 50-day moving average requirement.:
If the stock price fails the technical requirement, it's fine, we just put a pin in it and check next quarter. Even better, we can set an intra day alert in Trade Machine that will email and/or text you when both requirements are met.
Does it matter?... As we will review later in this dossier, yes, it matters. The last two pre-earnings run-ups were skipped because the stock was below the 50 DMA, and when back-testing those two periods, we see 0 wins and 2 losses and a 57.9% loss. All of that was totally avoided by obeying the technical requirement.
RISK MANAGEMENT
We can add another layer of risk management to the back-test by instituting and 40% stop loss and a 40% limit gain. Here is that setting:
In English, at the close of each trading day we check to see if the long option is either up or down 40% relative to the open price. If it was, the trade was closed.
RESULTS
Here are the results over the last three-years in Alphabet Inc:| GOOGL: Long 40 Delta Call | |||
| % Wins: | 89% | ||
| Wins: 8 | Losses: 1 | ||
| % Return: | 438.3% | ||
Tap Here to See the Back-test
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).
Notice that while this is a 3-year back-test and we would expect four times that many earnings triggers (4 earnings per year, makes 12 reports), the technical requirement using the 50-day moving average has avoided 3 pre-earnings attempts. In other words -- it's working.
Setting Expectations
While this strategy had an overall return of 438.3%, the trade details keep us in bounds with expectations:➡ The average percent return per trade was 46.43%.
Checking the Moving Average
You can check to see if the 50-day MA for GOOGL is above or below the current stock price by using the Pivot Points tab on www.CMLviz.com.Back-testing More Time Periods in Alphabet Inc
Now we can look at just the last year as well:
| GOOGL: Long 40 Delta Call | |||
| % Wins: | 100.00% | ||
| Wins: 2 | Losses: 0 | ||
| % Return: | 133% | ||
Tap Here to See the Back-test
We're now looking at 133% returns, on 2 winning trades and 0 losing trades.
➡ The average percent return over the last year per trade was 59.66%.
But, the technical safety valve protected this back-test from firing for the last two pre-earnings cycles. Those last two cycles saw 0 wins and 2 losses for a net 57.9% loss. The technical requirement is critical to this back-test.
WHAT HAPPENED
Trade Machine gives you the capacity to trade beyond luck, with stock or options, with and without technical triggers.Tap here to see it for yourself
Risk Disclosure
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.