Adobe Systems Incorporated (NASDAQ:ADBE) : Pre-earnings Momentum Trade With a Technical Trigger
Date Published: 2019-02-19
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 bullish momentum pattern in Adobe Systems Incorporated (NASDAQ:ADBE) stock 7 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.
You can follow along with the written word, below, or simply watch this 3-minute video:
The Bullish Stock Option Backtest Trade Before Earnings in Adobe Systems IncorporatedWe will examine the outcome of getting long a weekly call option in Adobe Systems Incorporated 7-calendar before earnings (using trading 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.
Since Adobe reports after the market closes, '0' days before earnings is the end of trading the day of the announcement, so it does not take on earnings risk even with this setting. This is not an earnings trade.
And here is the technical requirement -- note two requirements are "turned on," and that is the stock is above the 50-day simple moving average (SMA) and the 21-day exponential moving average (EMA) is also above he 200-day SMA.
If the stock price fails the technical requirements, it's fine, we just put a pin in it and check next quarter.
RISK MANAGEMENTWe 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.
RESULTSHere are the results over the last three-years in Adobe Systems Incorporated:
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 ExpectationsWhile this strategy had an overall return of 267%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 28.6%.
Checking the Moving AverageYou can check to see if the 50-day MA for ADBE is above or below the current stock price and if the 21-day EMA is greater than the 200-day SMA by using the Pivot Points tab on www.CMLviz.com.
Back-testing More Time Periods in Adobe Systems Incorporated
Now we can look at just the last year as well:
➡ The average percent return over the last year per trade was 59.7%.
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.