Roku Inc

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Option Backtester Pre-earnings Momentum Trade With a Technical Trigger in Roku

Pre-earnings Momentum Trade With a Technical Trigger in Roku - Option Backtester

Roku (NASDAQ:ROKU): Pre-earnings Momentum Trade With a Technical Trigger - Option Backtester

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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.


Given the recent rise in Roku (NASDAQ:ROKU) off of an earnings beat, now is the time, while it's fresh in our minds, to look at and set an alert for the bullish momentum pattern 5 trading days before earnings that has never lost since the company went public..

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.

Roku next has earnings due out in early May, but the research can and should be done now, so the alert and can be set, and the trigger won't pass us by.


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.

With that, we build a portfolio of alerts. Here is a selection of recent insights.

* The "Not Bearish" Trigger in Alphabet (GOOGL).
* Bullish Trigger in Shopify (SHOP).
* Bullish Trigger in Palo Alto Networks (PANW).
* Bullish Trigger in Google (GOOGL).
* Bearish Trigger in Twitter (TWTR).
* Bearish Trigger in Micron (MU).
* Bullish Trigger in Advanced Micro Devices (AMD).
* Bearish Trigger in Alibaba (BABA).
* Bearish Trigger in Nvidia (NVDA).
* Bullish Trigger in Nvidia (NVDA).
* Bearish Trigger in Netflix (NFLX).
* Bullish Trigger in Amazon (AMZN).

The goal is to create a portfolio of option trading backtests with alerts attached to them, so we don't have to stare at the screen all day, but rather Trade Machine is the work horse to notify when the ideas become actionable.

The Bullish Option Trade Before Earnings in Roku

We will examine the outcome of getting long a weekly call option (using 40 delta as the strike price) in Roku 5 trading-days before earnings and selling the call before the earnings announcement if and only if the stock price is above the 21-day exponential moving average (EMA).

Here's the set-up in great clarity; again, note that the trade closes before earnings, because Roku reports earnings after the market closes, so this trade does not make a bet on the earnings result.

And here is the technical requirement -- note two filters are "turned on." One is that the stock is above the 21-day exponential moving average (EMA) and the other is that the 20-day RSI is below 70.

The goal here is find times when the stock is showing momentum (stock price above the 21-day EMA) but at the same time is not overbought (RSI below 70). If the stock price fails the technical requirements, it's fine, we just put a pin in it and check next quarter, which is done automatically once an alert is set.


We can add another layer of risk management to the back-test by instituting and 30% stop loss and a 30% 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 40% or down 50% relative to the open price. If it was, the trade was closed.


Here are the results over the last three-years in Roku:

ROKU: Long 40 Delta Call

% Wins: 100%
Wins: 4 Losses: 0
% Return:  172% 

Tap Here to See the Back-test

The mechanics of the TradeMachine® are that it uses end of day prices for every back-test entry and exit (every trigger).

Setting Expectations

While this strategy had an overall return of 172%, the trade details keep us in bounds with expectations:
      The average percent return per trade was 55.6%.

That average trade result is above the 40% limit because the backtester uses end of day data to maintain exact structure for all trades, so the stops and limits won't be exact. Further, perhaps the bigger impact is the fact that stocks gap from day to day and that can move the profit and loss well past the stop and limit setting. (That's how real-life trading works, not hypothetical.)

Back-testing More Time Periods in Roku
Now we can look at just the last six-months as well:

ROKU: Long 40 Delta Call

% Wins: 100%
Wins: 2 Losses: 0
% Return:  64.4% 

Tap Here to See the Back-test

      The average percent return over the last six-months per trade was 35.1%.


Trade beyond luck. 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.