Gerdau S.A. (NYSE:GGB) : Pre-earnings Momentum Trade With a Technical Trigger
Date Published: 2019-03-13
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 Gerdau S.A. (NYSE:GGB) 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.
The Bullish Option Trade Before Earnings in Gerdau S.A.We will examine the outcome of getting long a monthly call option in Gerdau S.A. 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, just like this:
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 two-years in Gerdau S.A.:
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 2-year back-test and we would expect four times that many earnings triggers (4 earnings per year), the technical requirement using the 50-day moving average has avoided 4 pre-earnings attempts. In other words -- it's working.
We see a 90.3% return, testing this over the last 4 earnings dates in Gerdau S.A.. That's a total of just 56 days (14-days for each earnings date, over 4 earnings dates).
Setting ExpectationsWhile this strategy had an overall return of 90.3%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 20%.
Checking the Moving AverageYou can check to see if the 50-day MA for GGB is above or below the current stock price by using the Pivot Points tab on www.CMLviz.com.
Back-testing More Time Periods in Gerdau S.A.
Now we can look at just the last year as well:
We're now looking at 36.4% returns, on 1 winning trades and 0 losing trades.
➡ The average percent return over the last year per trade was 40%.
WHAT HAPPENEDThis is how people profit from the option market, its empirical testing, not luck. Now it's your turn.
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.
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