The Six-Day Pre-earnings Momentum Trade With Options in Facebook Inc
Facebook Inc (NASDAQ:FB) : The Six-Day Pre-earnings Momentum TradeDate Published: 2018-04-19
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.
There is a bullish momentum pattern in Facebook Inc (NASDAQ:FB) stock 6 calendar days before earnings, and we can capture that phenomenon explicitly by looking at returns in the option market.
According to our data provider, Wall Street Horizon, FB has earnings due out 4-25-2018 after the market closes, so six-day before then would be 4-19-2018.
The logic behind the option trading backtest is easy to understand -- in a bull 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. it is even stronger if the prior earnings move was large.
Here is the move Facebook move off of the last earnings release (we have highlighted the one-day move in yellow).
The stock popped from $186.89 to $193.09.
The Bullish Option Trade Before Earnings in Facebook Inc
We will examine the outcome of getting long a weekly call option in Facebook Inc 6-days before earnings (using calendar days) and selling the call one-day before the earnings announcement.
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.
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.
Here are the results over the last year in Facebook Inc:
|FB: Long 40 Delta Call|
|Wins: 4||Losses: 0|
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The mechanics of the TradeMachine™ 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 `FB` 6 days before earnings
We see a 274% return, testing this over the last 4 earnings dates in Facebook Inc.
While this strategy had an overall return of 274%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 48.2% over each six-day period.
A LARGER STORY
The larger story here for Facebook is, of course, the data scandal. If you believe the market will shrug off the news and regain its patterned momentum in the next six-days before earnings, then this could be an interesting historical result. If you believe history has changed because of this news, then this back-test could not be helpful.
It's personal decision, but know the facts. Also, yet another reminder, this trade does not hold through the earnings release -- it is strictly a pre-earning back-test.
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.
Bull markets tend to create optimism, whether it's deserved or not. To see how to find the best performing historical momentum, technical analysis or non-directional trades for any stock using empirical results rather than guesses, we welcome you to watch this quick demonstration video:
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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.