When to Get Long Adobe Systems, Even in This Market and the Great Recession
Adobe Systems Incorporated (NASDAQ:ADBE) : The Repeating Pattern in Adobe Systems Incorporated That Triggers Right After an Earnings Beat and The Option Trade That Follows
Date Published: 2018-11-26
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.LEDE
Even in this market, there is a bullish momentum pattern in Adobe Systems Incorporated (NASDAQ:ADBE) stock 2 trading day after earnings, if and only if the stock showed a large gap up after the actual earnings announcement. This same strategy worked during the worst part of the Great Recession as well.Yes, there is room for bullish speculation even in a down market -- we just need proper conditions.
This is a conditional entry -- the company reports earnings and if the stock move off of that report is a 3% gain or larger, then a bullish position is back-tested looking for continuing momentum in a short window to follow. The event is rare, but when it has occurred, the back-test results are noteworthy.
Adobe Systems Incorporated (NASDAQ:ADBE) Earnings
In Adobe Systems Incorporated, if the stock move immediately following an earnings result was large (3% or more to the upside), if we test waiting two-days after that earnings announcement and then bought a three-week at the money (50 delta) call, the results were quite strong.Here is the timing set-up around earnings:
Rules
* Condition: Wait for the one-day stock move off of earnings, and if it shows a 3% gain or more in the underlying, then, follow these rules:* Open the long at-the-money call two-trading days after earnings.
* Close the long call 14 calendar days after earnings.
* Use the options closest to 21 days from expiration (but more than 14 days).
But, this is a conditional back-test, which is to say, it only Triggers if an event before it occurs.
RISK CONTROL
Since blindly owning calls can be a quick way to lose in the option market, we will apply a tight risk control to this analysis as well. We will add a 40% stop loss and a 40% limit gain.
In English, at the close of every trading day, if the call is up 40% from the price at the start of the trade, it gets sold for a profit. If it is down 40%, it gets sold for a loss. This also has the benefit of taking profits if there is a stock rally early in the two-week period rather than waiting to close 14-days later.
Another risk reducing move we made was to use 21-day options and only hold them for 14-days so the trade doesn't suffer from total premium decay.
RESULTS
If we bought the at-the-money call in Adobe Systems Incorporated (NASDAQ:ADBE) over the last three-years but only held it after earnings and after an earnings pop higher, we get these results: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` 1 days after earnings
Looking at Averages
The overall return was 284%; but the trade statistics tell us more with average trade results:➡ The average return per trade was 56.6% over each 13-day period.
BEAR MARKET RESULTS
If we tested this exact same strategy, but only did it between 2007-09-30 and 2009-04-30, so the depths of the Great Recession, yes, indeed, this worked back then as well.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).
WHAT HAPPENED
This hard downturn in the market is a rare opportunity for option investors. See the trade that has been working, exactly this October and November, right now:Tap Here, See for Yourself
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.