Option Intelligence: How to Trade Baidu Immediately After Earnings
Baidu Inc (NASDAQ:BIDU) : How to Trade Baidu Inc After an Earnings Rip
Date Published: 2018-07-06
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
When the market feels tenuous sometimes stopping to think -- waiting for confirmation of momentum -- can be a more comfortable back-test than trying to get ahead of it. We have shown this result to be true in Apple on the upside (earnings beats), Google on the downside (earnings misses), and others.
Today we see that this type of momentum confirmation process has worked very well with the "Google of China," Baidu.
This is a conditional entry -- the company reports earnings then, if and only 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.
Baidu Inc (NASDAQ:BIDU) Earnings
In Baidu Inc, if the stock move immediately following an earnings result was large (3% or more to the upside), if we test waiting one-day after that earnings announcement and then bought a three-week at the money (50 delta) call, the results were quite strong.
This back-test opens one-day after earnings were announced to try to find a stock that continues an upward trajectory after an earnings rally.
We can test this approach without bias with a custom option back-test. 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 one-trading day 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).
This is a straight down the middle direction trade -- this trade wins if the stock is continues on an upward trajectory after a large earnings move the two-weeks following earnings and it will stand to lose if the stock does not rise. 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 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 Baidu Inc (NASDAQ:BIDU) 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 `BIDU` 1 days after earnings
Looking at Averages
The overall return was 290.3%; but the trade statistics tell us more with average trade results:
➡ The average return per trade was 45.1% over each 13-day period.
➡ The average return per winning trade was 69.16% over each 13-day period.
➡ The average return per losing trade was -75.2% over each 13-day period.
Pay special attention to the return of the losing trades -- those are not trivial.
Trade Discovery
We found this result quite easily using the Pro Scanner portion of Trade Machine, using the NASDAQ 100 as our study group and the "1 Day After Earnings Jump, Long Call" scan.
Over the last 3-years, only three companies in the NASDAQ 100 have seen 5 wins for this conditional post earnings rip trigger.
Looking at the Last Year
While we just looked at a multi-year back-test, we can also hone in on the most recent year with the same test:
| BIDU: Long 50 Delta Call | |||
| % Wins: | 100% | ||
| Wins: 3 | Losses: 0 | ||
| % Return: | 229.6% | ||
Tap Here to See the Back-test
Three of the last four earnings cycles, BIDU has shown this gap up after earnings, and all three times, it has shown a continuation of that momentum upward.
➡ The average return for the last year per trade was 78.07% over each 13-day period.
WHAT HAPPENED
You can guess stock direction -- guess momentum -- guess anything. But there's a lot less luck to successful option trading than that -- and every professional trader knows it. To learn more watch this quick demonstration video:
Tap Here to See the Tools at Work
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.