Stock Option Backtester Applied Materials (AMAT) - Here is the Pattern that Triggers Right After an Earnings Beat and The Option Trade That Follows
Date Published: 2019-02-11
DisclaimerThe results here are provided for general informational purposes from the CMLviz Trade Machine Stock Option Backtester as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.
LEDEWe wrote about this pattern in July of 2018, and as Applied Materials' earnings approach on 2-14-2019, it's time to look at it again. Even further, Lam Research, the company that in many ways mirrors Applied's business, just followed the same pattern on Jan 28, 2019, showing a 44.7% gain in four days with long calls after an earnings beat. Let's see the pattern.
Today we note a powerful bullish momentum pattern in Applied Materials stock 1 trading day after earnings, if and only if the stock showed a large gap up 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% 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.
Wall Street Horizon has earnings due out on 2019-02-14 after the market closes. Set an alert for the "earnings jump of 3%," and let Trade Machine do the work for you. You don't have to stare at the screen.
Applied Materials Inc (NASDAQ:AMAT) EarningsIn Applied Materials 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 at the money (50 delta) call near the end of the close of trading on that day after earnings, 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.
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% gain or more in the underlying, then, follow these rules:
* Open the long at-the-money call (using 50 delta as the strike price) 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 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 CONTROLSince blindly owning calls 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 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.
RESULTS FROM THE OPTION BACKTESTERWhen we test going long the at-the-money call (50 delta strike price) in Applied Materials Inc (NASDAQ:AMAT) over the last four-years but only held it after earnings and after a 3% or larger earnings rise the following day, we see these results:
The mechanics of the Trade Machine® are that it uses end of day prices for every back-test entry and exit (every trigger).
Looking at AveragesThe overall return was 385%; but the trade statistics tell us more with average trade results:
➡ The average return per trade was 55.1% over each 13-day period.
See itThe last time this triggered for AMAT was February of 2018. Here is a stock chart of that period, with the "E" icon representing the earnings date. See the pop off of earnings, which was the trigger, and then the continued rise afterward.
Pattern DiscoveryWe simply used the Trade Machine® Pro scanner. We examined the NASDAQ 100 as our ticker group, and then looked at the "1 Day After Earnings Jump, Long Call" strategy.
One click of the button gave us the results that were presented above.
MOVING FORWARDThere's a lot less luck to successful option trading than many people realize. Take a reasonable idea, test it, and apply lessons learned.
Tap Here, See for Yourself
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.