Right After Earnings, The Intelligent Options Trade in Procter & Gamble Company (The)
Procter & Gamble Company (The) (NYSE:PG) : Right After Earnings, The Intelligent Options Trade
Date Published: 2019-07-19
LEDE
All signs point to this being a bumpy earnings cycle for the market, and in cases like this, we can turn to win rates rather than aggressive bullish or bearish positioning. Today we look at a pattern that has persisted in Procter & Gamble Company (The) (NYSE:PG) that shows just a single loss in the last five-years and two losses over the last decade.
Preface
Over the 2-, 3-, and 5-year time periods 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%.
Procter & Gamble Company (The) (NYSE:PG) 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 Procter & Gamble Company (The), 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 40 delta for the short strike price and the 30 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 40/30 delta out-of-the-money put spread with the requirements listed above in Procter & Gamble Company (The) (NYSE:PG) over the last five-years but only held it after earnings we get these results:
| PG: Short 40 delta / 30 delta Put Spread |
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| % Wins: | 88.9% | ||
| Wins: 8 | Losses: 1 | ||
| % Return: | 182% | ||
Tap Here to See the Back-test
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 Expectations
While this strategy had an overall return of 182%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 18.9% in just 27-calendar days.
ONE-YEAR OPTION BACKTESTER RETURNS
If we sold this 40/30 delta out-of-the-money put spread in Procter & Gamble Company (The) (NYSE:PG) over the last year but only held it if and only if the conditions were all met, we see these results:
| PG: Short 40 delta / 30 delta Put Spread |
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| % Wins: | 100% | ||
| Wins: 3 | Losses: 0 | ||
| % Return: | 102% | ||
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 Procter & Gamble Company (The).
This strategy is not a silver bullet, it does not take on the risk of earnings, and while it's slightly bullish, it really isn't a stock direction investment either. In many ways, earnings results are just a coin flip -- and we are not interested in flipping coins with option strategies.
WHAT HAPPENED
Pattern recognition, not luck. If you're an option trader, tap here to learn more.
Risk Disclosure
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.