Pre-earnings Momentum Trade With a Technical Trigger in ASML Holding N.V.
ASML Holding N.V. (NASDAQ:ASML) : Pre-earnings Momentum Trade With a Technical Trigger
Date Published: 2019-06-29
Disclaimer
The results here are provided for general informational purposes from the CMLviz Trade Machine Stock Option Backtester as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.Preface
The pre-earnings momentum pattern has been one of the great trends over the last 13-years in the market, and in particular, the option market. Today we look at a pattern that may well trigger again on July 10th, 2019.There is a bullish momentum pattern in ASML Holding N.V. stock 7 calendar days before earnings. Further, we use moving averages as a safety valve to try to avoid opening a bullish position while a stock is in a technical break down, like the fourth quarter of 2018. The strategy won't work forever, but for now it is a momentum play that has not only returned 593.5%, but has also shown a win-rate of 100% over the last 3-years.
This same strategy also worked in the throes of the bear market from 2007-2008, and we discuss those results near the finale of this article.
According to Wall Street Horizon, ASML has earnings due out on 7-17-2019 before the market opens. 7-days before then would be 7-10-2019, near the market close.
LOGIC
The logic behind the option trading test is easy to understand -- in an any 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. That phenomenon has been well documented by Capital market Laboratories in our seminal webinar on market patterns.The Bullish Option Trade Before Earnings in ASML Holding N.V. (NASDAQ:ASML)
We will examine the outcome of getting long a weekly call option (the options closest to 7 days to expiration but at least 7 days) in ASML Holding N.V. 7-days before earnings (using calendar days) and selling the call before the earnings announcement if and only if this technical analysis condition is met: the stock price is above the 50-day simple moving average.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.
And here is the technical requirement -- note only one is "turned on," and that is the 50-day moving average requirement.:
Here's a visual representation, where the stock price 7-days before earnings (circled) is above the 50-day moving average (black line), and therefore triggers a back-test.
If the stock price fails the technical requirement, it's fine, we just put a pin in it and check next quarter.
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 ASML Holding N.V.:| ASML: Long 40 Delta Call | |||
| % Wins: | 100% | ||
| Wins: 8 | Losses: 0 | ||
| % Return: | 593.5% | ||
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).
Notice that while this is a 3-year back-test and we would expect four times that many earnings triggers (4 earnings per year), the technical requirement using the 50-day moving average has avoided 4 pre-earnings attempts. In other words -- it's working.
This is not a magic bullet, rather it's a bullish strategy. In the short-term it hasn't seen any losses, but more importantly, whether or not it loses on any given earnings run-up, the 593.5% return in less than two-full months of trading is predicated on an idea of consistent momentum.
Setting Expectations
While this strategy had an overall return of 593.5%, the trade details keep us in bounds with expectations:➡ The average percent return per trade was 55.52% over each 7-day period.
Checking the Moving Average
You can check to see if the 50-day moving average for ASML is above or below the current stock price by using the real-time moving average scatter plots on MovingAverages.com.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 ASML Holding N.V.
Now we can look at just the last year as well:
| ASML: Long 40 Delta Call | |||
| % Wins: | 100.00% | ||
| Wins: 1 | Losses: 0 | ||
| % Return: | 27.1% | ||
Tap Here to See the Back-test
We're now looking at 27.1% returns, on 1 winning trades and 0 losing trades.
➡ The average percent return over the last year per trade was 27.16%.
We can see that given the trouble with semi-conductors in the last year, the stock has not been above the 50-day moving average for three of the last four pre-earnings cycles.
WHAT HAPPENED
There's a better way -- try pattern recognition and backtesting.Risk Disclosure
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.
You should read the Characteristics and Risks of Standardized Options.