Stock Option Backtester Palo Alto Networks (NYSE:PANW) Fortinet (NASDAQ:FTNT) : The Exact Bullish Trigger, Even During a Bear Market
Date Published: 2019-02-15
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.
PrefaceThere is a technical set up such that it triggers bullish times to trade Palo Alto Networks and Fortinet, that has shown triple digit returns during the bull market, and a perfectly executed "no trigger" during a bear market.
Cyber security is one of the most powerful secular thematics driving technology. Here is a chart of the size of the cyber security market worldwide from Statista.
While picking the winners is a different challenge, what we find in this sector are stocks that are volatile, but tend to rise sharply when the right conditions are met. To validate the robustness of the technical set-up, we want to demonstrate to ourselves that the trigger works for more than one company in this sector with the identical rules.
We do that, right now.
PortfolioAs a reminder, we recently wrote on other technical set-ups. We look into both bullish and bearish triggers for one goal:
Build a portfolio of option set-ups, diversified not just by ticker, but by strategy. It's in this process that we identify the times were short bursts of risk exposure have been profitable in the past.
* The Bullish Trigger in Google (GOOGL).
* The Bearish Trigger in Twitter (TWTR).
* The Bearish Trigger in Micron (MU).
* The Bullish Trigger in Advanced Micro Devices (AMD).
* The Bearish Trigger in Alibaba (BABA).
* The Bearish Trigger in Nvidia (NVDA).
* The Bullish Trigger in Nvidia (NVDA).
* The Bearish Trigger in Netflix (NFLX).
* The Bullish Trigger in Amazon (AMZN).
The Short-term Bullish Option Trade in Cyber Security: Palo Alto Networks and FortinetWe will examine the outcome of going long an out-of-the-money (using 40 delta as the strike price) call, in options that are the closest to 30-days from expiration. But we follow three rules:
* Never Trade Earnings
Let's not worry about stock direction or earnings, let's try to find a back-test that benefits from volatility. Here it is, first, we enter the long call.
* Use a technical trigger to start the trade, if and only if these specific items are met.
* Wait until the day that the stock price crosses above the 10-day exponential moving average (EMA).
* The 50-day simple moving average (SMA) is greater than the 200-day SMA.
* The 21-day EMA is greater than the 50 SMA.
* the 20-day RSI is below 65 (to protect against getting long during an over bought situation)
The middle two requirements are sometimes called "stacked moving averages." Here is a nice simple image of the technical requirement:
* Finally, we set a very specific type of limit:
* Use a 40% stop and limit.
At the end of each day, the back-tester checks to see if the long call is up or down 40%. If it is, it closes the position.
RESULTS FROM THE OPTION BACKTESTERHere are the results over the last three-years in Palo Alto Networks and Fortinet:
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).
Setting ExpectationsFor PANW, while this strategy had an overall return of 320%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 28.4%.
For FTNT, while this strategy had an overall return of 600%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 30.2%.
Back-testing More Time Periods in Palo Alto Networks and FortinetIf we just look at the time period from 10-1-2018 through 12-31-2018 we find the silently loud result, namely, no trades triggered. That's exactly what we would hope to see -- a technical trigger that signals a bullish run should not have triggered during this time period -- the value of no trade trigger can be enormous.
WHAT HAPPENED: Option BacktesterWin.
Tap here to see it for yourself
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.