Two Opportunities: Pre-earnings Momentum Trade With a Technical Trigger in Netflix Inc
Date Published: 2019-04-09
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 Netflix Inc (NASDAQ:NFLX) stock 3 trading 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.
There is also a different type of trade after earnings, that has a higher historical win rate with a lower historical return -- the trade off has been less risk for a higher probability trade.
LOGICThe logic behind the option trading test is easy to understand -- in an any market there can be a stock rise ahead of earnings on optimism, or upward momentum, that sets in just 3-trading days before an earnings date. That phenomenon has been well documented by Capital market Laboratories in our seminal webinar on market patterns. Now we can see it in Netflix Inc.
The Bullish Option Trade Before Earnings in Netflix Inc (NASDAQ:NFLX)We will examine the outcome of getting long a weekly call option in Netflix Inc 3-days 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.
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.
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 Netflix Inc:
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 3-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 1 pre-earnings attempt.. In other words -- it's working.
We see a 102.3% return, testing this over the last 11 earnings dates in Netflix Inc. That's a total of just 33 days (3-days for each earnings date, over 11 earnings dates). This has been the results of following the trend of bullish sentiment into earnings while avoiding the actual earnings result.
Setting ExpectationsWhile this strategy had an overall return of 102.3%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 18.16%.
Checking the Moving AverageYou can check to see if the 50-day MA for NFLX is above or below the current stock price by using the Pivot Points tab on www.CMLviz.com.
Back-testing More Time Periods in Netflix Inc
Now we can look at just the last six-months as well:
The Alternative Trade - After EarningsAn alternative to buying a call pre-earnings is to simply wait for earnings to occur, and then sell short a 30 delta / 10 delta put spread in options closest to 21 days to expiration, with these rules:
* Wait two full days after earnings so the stock gymnastics after earnings are done.
* Only test this trade if the stock move the day after earnings (the earnings' reaction) is positive -- in this case we just call it a greater than 0.1% move on the single day after earnings.
* Only enter this backtest if the stock is still above the 50-day simple moving average.
Here are those results over the last 3 years:
WHAT HAPPENEDThere's a better way -- try pattern recognition. Tap here to try it for yourself
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.
You should read the Characteristics and Risks of Standardized Options.