A Repeating Pattern You Might Not Expect in Autodesk Inc Could Trigger Soon
Autodesk Inc (NASDAQ:ADSK) : How to Trade Autodesk Inc Momentum After an Earnings Gap Drop
Date Published: 2018-07-20
DisclaimerThe 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.
LEDEWhen a momentum stock misses earnings and gaps down after the event by 3% or more, that can be, for a group of companies, a signal of a repeating pattern that has experienced further price deterioration in a short window.
It turns out that there is such a bearish momentum pattern in Autodesk Inc (NASDAQ:ADSK) stock 1 trading day after earnings, if and only if the stock showed a large gap down after the actual earnings announcement.
Here is a stock chart for ADSK that incorporates the last 3 earnings events -- two of which happened to be drops of more than 3% immediately following earnings. After those events, the stock kept going down in that short window.
NOTE: This is a conditional entry -- the company reports earnings and if the stock move off of that report is a 3% loss or larger, then a bearish position is back-tested looking for continuing downward momentum. The event is rare, but when it has occurred, the back-test results are noteworthy.
Autodesk Inc (NASDAQ:ADSK) EarningsThis back-test opens one-day after earnings were announced to try to find a stock that continues a downward spiral after an earnings gap down.
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% loss or more in the underlying, then, follow these rules:
* Open the long at-the-money put one-trading day after earnings.
* Close the long put 14 calendar days after earnings.
* Use the options closest to 21 days from expiration (but more than 14 days).
This is a straight down the middle direction trade -- this trade wins if the stock is continues on a downward trajectory after a large earnings move the two-weeks following earnings and it will stand to lose if the stock rises, instead. This is not a silver bullet -- it's a trade that needs to be carefully examined.
But, this is a conditional back-test, which is to say, it only triggers if an event before it occurs.
RISK CONTROLSince blindly owning put 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 put 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 decline 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.
Here are the results of a long at-the-money put in Autodesk Inc (NASDAQ:ADSK) over the last three-years but only opened after earnings if there was a 3% drop or more., we get these results:
Long 50 Delta Put
|Wins: 4||Losses: 0|
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 `ADSK` 1 days after earnings
Looking at AveragesThe overall return was 321%; but the trade statistics tell us more with average trade results:
➡ The average return per trade was 55.5% over each 13-day period.
LOOKING AT THE LAST YEARWe have run this same test, but limited it to the last year:
Long 50 Delta Put
|Wins: 2||Losses: 0|
Tap Here to See the Back-test
WHAT HAPPENEDThere is empirical evidence of repeating patterns that have resulted in profitable option trades and this has been one of them. To learn about more of them, bullish, bearish, and non-directional, watch the first 70 seconds of the video on the page below:
Tap Here to See the Tools at Work
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.