Right After Earnings, The Intelligent Options Trade in Amazon.com Inc
Amazon.com Inc (NASDAQ:AMZN) : Right After Earnings, The Intelligent Options Trade
Date Published: 2019-04-11
LEDE
This is a simple option trade that starts two-days after Amazon.com Inc (NASDAQ:AMZN) earnings and lasts for the one month to follow. We use some technical analysis requirements to bolster the win rate by avoiding times when the stock is in a bearish momentum zone.
Over time 2-, 3-, and 5-year time period ending on April 10th, 2019, this backtest with the technical and stock return requirements, has shown a 81% win rate for the constituents of the Nasdaq 100. For the year ending April 10th, 2019, the win rate has been 89%. This isn't an aggressive directional trade -- it is designed to collect premium on a speculation that the stock will "not be bearish" for a defined period of time.
Amazon.com Inc (NASDAQ:AMZN) Earnings
While the mainstream media likes to focus on the actual earnings move for a stock, that's the distraction when it comes to option trading.
For Amazon.com Inc, if the stock move the day following earnings was up (any amount), and then we waited another trading day after the stock move, and fulfilled a technical requirements, and then sold an one-month out of the money put spread, the results were simply staggering. We use two-days to allow the stock to fully reach equilibrium post earnings.
We can examine this intelligent approach, objectively, with a custom option back-test. Here is our earnings set-up:
Rules
Open short put spread 2-days after earnings if these requirements are met:
* The stock price is above the 50-day simple moving average and the RSI (20-day) is below 70.
* The stock price move the single day after earnings was greater than 0.1%, which essentially means, the stock did not go down the day following earnings.
If and only if those requirements are met -- a short-put spread is opened using the 30 delta for the short strike price and the 10 delta for the long strike price.
* Close short put spread 29 calendar days later.
* Use the options closest to 30-days to expiration, but longer than 29 days.
MULTI-YEAR OPTION BACKTEST RETURNS
If we sold this 30/10 delta out-of-the-money put spread with the requirements listed above in Amazon.com Inc (NASDAQ:AMZN) over the last three-years but only held it after earnings we get these results:
| AMZN: Short 30 Delta / 10 Delta Put Spread |
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| % Wins: | 100% | ||
| Wins: 5 | Losses: 0 | ||
| % Return: | 60.8% | ||
Tap Here to See the Back-test
We see a 60.8% return, testing this over the last 5 earnings dates in Amazon.com Inc. That's a total of just 140 days (28 days for each earnings date, over 5 earnings dates).
This is not a magic bullet, rather it's a strategy. In the short-term it hasn't seen any losses, but more importantly, whether or not it loses on any given post earnings move, the 60.8% return is based on an idea of consistency. It will lose some times, but over the long-run, it has won.
Setting Expectations
While this strategy had an overall return of 60.8%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 16.56% in just 27-calendar days.
ONE-YEAR OPTION BACKTESTER RETURNS
If we sold this 30/10 delta out-of-the-money put spread in Amazon.com Inc (NASDAQ:AMZN) over the last year but held it if and only if the conditions were all met, we see these results:
| AMZN: Short 30 Delta / 10 Delta Put Spread |
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| % Wins: | 100% | ||
| Wins: 2 | Losses: 0 | ||
| % Return: | 35.9% | ||
Tap Here to See the Back-test
MORE TO IT THAN MEETS THE EYE
While a short put spread is a strategy that gains profits if the underlying stock "doesn't go down a lot," there is more to this with Amazon.com Inc.
What we're after with this approach is identifying companies that make their large stock move the day after earnings -- whether that's up or down -- and after that, find a sense of equilibrium in the stock price for the next month. This is what we find in Amazon.com Inc (NASDAQ:AMZN) .
WHAT HAPPENED
This is it -- this is how people profit from the option market -- try pattern recognition.