Activision Blizzard, Inc (NASDAQ:ATVI): Benefit from Volatility: The Secret to Option Trading Before Earnings
Date Published: 2018-10-31
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.
PrefaceWith the market's direction becoming tenuous, we can explore option trading opportunities in Activision Blizzard (NASDAQ:ATVI) that do not rely on stock direction. It turns out, over the long-run, for stocks with certain tendencies like Activision, there is a clever way to trade market anxiety before earnings announcements with options.
ATVI has earnings due out next on 2018-11-08.
The Trade Before EarningsWhat a trader wants to do is to see the results of buying an out of the money (40 delta) strangle a week before earnings, and then sell that strangle just before earnings.
Here is the setup:
We are testing opening the position 7 calendar days before earnings, using the options that are closest to 14 days from expiration, and then closing the position 1 day before earnings. This is not making any earnings bet. This is not making any stock direction bet.
Once we apply that simple rule to our back-test, we run it on an out-of-the-money strangle:
If we did this long out-of-the-money (also called '40-delta') strangle in Activision Blizzard, Inc (NASDAQ:ATVI) over the last two-years but only held it before earnings 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).
Setting ExpectationsWhile this strategy has an overall return of 126%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 12.8% over each 7-day period.
➡ The average percent return per winning trade was 15.9% over each 7-day period.
➡ The average percent return per losing trade was -9.1% over each 7-day period.
WHAT HAPPENEDThis is it -- this is how people profit from the option market -- finding trading opportunities that avoid earnings risk and work equally well during a bull or bear market.
Tap Here, See for Yourself
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.