Date Published: 2017-05-18
Written by Ophir Gottlieb
While Autodesk Inc (NASDAQ:ADSK) just crushed earnings again, sending shares soaring in the after hours trade, one option trade after earnings has been a consistent winner. It takes no earnings risk, little stock direction risk and over the last year has never lost while returning over 160% annualized returns.
The Trade After the Excitement
While most of the focus is on the actual earnings move for a stock, that's the distraction when it comes to the option market. For Autodesk Inc, irrespective of whether the earnings move was up or down, if we waited one-day after the stock move from earnings, and then sold an out of the money put spread, the results were very strong.
We can examine this, objectively, with a custom option back-test. Here is our earnings set-up:
* Open short put spread 1 day after earnings
* Close short put spread 29 days later
* Use the option that is closest to but greater than 30-days away from expiration
Here are the results over the last year:
That's a 47.3% return, with 4 winning trades and 0 losing trades. The total holding period was less than 4 full months, meaning the annualized return was over 160%. No earnings risk was taken -- this is not a coin flip over earnings.
This strategy works beautifully in many companies where heavy stock volume follows the earnings release. The logic behind this trade follows a narrative that even after a bad earnings release, if we wait a day after, we find the stock at a point of equilibrium.
If it gapped down -- that gap is over. If it beat earnings, the downside move is already likely muted. Here's how this strategy has done over the last 6-months:
That's a 21.3% return, on 2 winning trades and 0 losing trades. Since this is a total of a two-month holding period, that 21.3% is actually over 120% annualized.
If you're curious, yes, this also produced positive returns over the last 3-years. Here are those results.
Now we can find some comfort in this approach where is shows 9 winning trades and just 2 losing trades over the last three-years.
There are patterns to stock behaviors before and after earnings and those patterns reveal opportunities in the option market, without taking the actual risk of earnings. You can find them, stock by stock, Apple, Google, Netflix and of course Autodesk Inc are just a handful of examples. There has been edge here with this strategy.
To see how to do this for any stock and for any strategy with just the click of a few buttons, we welcome you to watch this quick demonstration video:
Tap Here to See the Tools at Work
Thanks for reading.
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.
The author has no position in Autodesk Inc (NASDAQ:ADSK) as of this writing.