If Adobe Beats Earnings Buckle Up -- Here's the Patterned Momentum that Follows
If Adobe Systems Incorporated Beats Earnings -- Here's the Patterned Momentum that Follows
Date Published: 2018-06-06
Disclaimer
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 Adobe Systems Incorporated (NASDAQ:ADBE) stock 2 calendar days after earnings, if and only if the stock shows a large gap up after the actual earnings announcement. The event occurs about once a year, but when it has, it has never shown a loss in the last 3-years.
The strategy won't work forever, but for now it is a momentum play that has not only returned 284%, but has also shown a win-rate of 100%.
Adobe Systems has an earnings date estimate for 2018-06-14, after the market closes. Whenever the actual earnings date is, it's the stock reaction off of that news that is the possible trigger for the back-test. As an example, here is the last earnings report, the move off of it, and the quick momentum trade that showed a win:
We see a gap up off the earnings, where the stock climbed from $218.87 to $225.55, then a two-day breather, and then the third-day showed a spike from $222.18 to $229.75.
LOGIC
The logic behind the option trading backtest is easy to understand -- it's a reasonable hypothesis to test that if a stock shows a large earnings move up, then in the two-weeks to follow it could melt up off of that news, That is the phenomenon we are looking to test.
Here is the set up, in great clarity; note that the back-test opens two-days after 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-years in Adobe Systems Incorporated of the long 50 delta (at the money) option that is closest to 21 days from expiration only if ADBE moves moves 3% or higher the day after the earnings announcement:
| ADBE: Long 50 Delta Call | |||
| % Wins: | 100% | ||
| Wins: 4 | Losses: 0 | ||
| % Return: | 284% | ||
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).
Track this trade idea. Get alerted for ticker `ADBE` 2 days after earnings
Setting Expectations
While this strategy had an overall return of 284%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 56.6% over each 12-day period that was triggered.
The Last Year
For completeness, we show the results over the last year, as well:
| ADBE: Long 50 Delta Call | |||
| % Wins: | 100% | ||
| Wins: 1 | Losses: 0 | ||
| % Return: | 94.8% | ||
Tap Here to See the Back-test
WHAT HAPPENED
Bullish momentum and sentiment after of earnings can be quite powerful with the tailwind of an earnings beat. This is just one example of what has become a tradable phenomenon in Adobe Systems Incorporated. To identify patterns that have repeated over and over again, empirically, 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.