The Incredible One-Week Pre-earnings Momentum Trade in Microsoft Corporation
Microsoft Corporation (NASDAQ:MSFT): The One-Week Pre-earnings Momentum Trade With Options
Date Published: 2018-04-13Disclaimer
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.
PREFACE
There is a bullish momentum pattern in Microsoft Corporation (NASDAQ:MSFT) stock 7 calendar days before earnings, that has outperformed every other stock in North America over the last three and a half years.
According to our earnings date provider, Wall Street Horizon, Microsoft's next earnings date is due on 4-26-2018, after market hours. 7-days before then would be 4-19-2018.
LOGIC
The logic behind the option trading backtest is easy to understand -- in a bull market there can be a stock rise ahead of earnings on optimism, or upward momentum, that sets in the one-week before an earnings date. Now we can see it in Microsoft Corporation and it has been unlike any other company.
The Bullish Option Trade Before Earnings in Microsoft Corporation
We will examine the outcome of getting long a weekly call option in Microsoft Corporation 7-days before earnings (using calendar days) and selling the call before the earnings announcement.
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.
RISK MANAGEMENT
We 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.
RESULTS
Here are the results over the last three and a half years in Microsoft Corporation:
| MSFT: Long 40 Delta Call | |||
| % Wins: | 100% | ||
| Wins: 14 | Losses: 0 | ||
| % Return: | 1084% | ||
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).
Track this trade idea. Get alerted for ticker `MSFT` 7 days before earnings
We see a 1,084% return, testing this over the last 14 earnings dates in Microsoft Corporation. That's a total of just 84 days (7-days for each earnings date, over 12 earnings dates). This has been the results of following the trend of bullish sentiment into earnings while avoiding the actual earnings result.
This is not a magic bullet, even if it feels like it has been. There are no guarantees - let's not let historical success dictate an incorrect mindset. But, in the recent three and a half years it hasn't seen any losses.
Setting Expectations
While this strategy had an overall return of 1084%%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 52.2% per 7-day period.
Discovery
We found this trade rather easily using the Trade Machine Pro® scanner. We used the NASDAQ 100 as our study group and simply looked for the "7-days pre-earnings Long Call" results.
Is This Just Because Of a Bull Market?
It's a fair question to ask if these returns are simply a reflection of a bull market rather than a successful strategy. It turns out that this phenomenon of pre-earnings optimism also worked very well during 2007-2008, when the S&P 500 collapsed into the "Great Recession."
The average return for this strategy, by stock, using the Nasdaq 100 and Dow 30 as the study group, saw a 45.3% return over those 2-years. And, of course, these are just 8 trades per stock, each lasting 7 days.
* Yes. We are empirical.
* Yes, you are better than the rest now that you know this.
* Yes, you are powerful for it.
Back-testing More Time Periods in Microsoft Corporation
Now we can look at just the last year as well:
| MSFT: Long 40 Delta Call | |||
| % Wins: | 100.00% | ||
| Wins: 4 | Losses: 0 | ||
| % Return: | 272.6% | ||
Tap Here to See the Back-test
We're now looking at 272.6% returns, on 4 winning trades and 0 losing trades.
➡ The average percent return over the last year per trade was 64.4% over each 7-day period.
WHAT HAPPENED
Bull markets tend to create optimism, whether it's deserved or not. To see how to find the best performing historical momentum, technical analysis or non-directional trades for any stock using empirical results rather than guesses, we welcome you to watch this quick demonstration video:
Tap Here to See the Tools at Work
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.