Pre-earnings Momentum Trade With a Technical Trigger in Check Point Software Technologies Ltd.
Check Point Software Technologies Ltd. (NASDAQ:CHKP) : Pre-earnings Momentum Trade With a Technical Trigger
Date Published: 2019-03-13
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
There is a bullish momentum pattern in Check Point Software Technologies Ltd. (NASDAQ:CHKP) 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 296.4%, but has also shown a win-rate of 70%.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.
LOGIC
The logic behind the option trading backtest is easy to understand -- in a 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. Now we can see it in Check Point Software Technologies Ltd..The Bullish Option Trade Before Earnings in Check Point Software Technologies Ltd.
We will examine the outcome of getting long a weekly call option in Check Point Software Technologies Ltd. 7-days before earnings (using calendar days) and selling the call before the earnings announcement if and only if 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 Check Point Software Technologies Ltd.:| CHKP: Long 40 Delta Call | |||
| % Wins: | 70% | ||
| Wins: 7 | Losses: 3 | ||
| % Return: | 296.4% | ||
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 2 pre-earnings attempts. In other words -- it's working.
We see a 296.4% return, testing this over the last 10 earnings dates in Check Point Software Technologies Ltd.. That's a total of just 70 days (7-days for each earnings date, over 10 earnings dates). This has been the results of following the trend of bullish sentiment into earnings while avoiding the actual earnings result.
We can also see that this strategy hasn't been a winner all the time, rather it has won 7 times and lost 3 times, for a 70% win-rate and again, that 296.4% return in less than six-full months of trading. The trade will lose sometimes, but over the most recent trading history, this momentum and optimism options trade has won ahead of earnings.
Setting Expectations
While this strategy had an overall return of 296.4%, the trade details keep us in bounds with expectations:➡ The average percent return per trade was 34.49%.
Checking the Moving Average
You can check to see if the 50-day MA for CHKP is above or below the current stock price by using the Pivot Points tab on www.CMLviz.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 Check Point Software Technologies Ltd.
Now we can look at just the last year as well:
| CHKP: Long 40 Delta Call | |||
| % Wins: | 66.67% | ||
| Wins: 2 | Losses: 1 | ||
| % Return: | 48% | ||
Tap Here to See the Back-test
We're now looking at 48% returns, on 2 winning trades and 1 losing trades.
➡ The average percent return over the last year per trade was 26.29%.
WHAT HAPPENED
Bullish momentum and sentiment ahead of earnings has been, empirically, a repeating pattern both in a bull and bear market for some companies. This is just one example of what has become a tradable phenomenon in Check Point Software Technologies Ltd..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.
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