The Bullish Technical Trigger in Facebook
Facebook Inc (NASDAQ:FB) : Pre-earnings Momentum Trade With a Technical Trigger
Date Published: 2019-01-08
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.Preface
There is a bullish momentum pattern in Facebook Inc (NASDAQ:FB) 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 Bullish Option Trade Before Earnings in Facebook Inc
We will examine the outcome of getting long a weekly call option in Facebook Inc 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 30% stop loss and a 30% 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 30% relative to the open price. If it was, the trade was closed.
RESULTS
Here are the results over the last two-years in Facebook Inc: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 2-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. Both of the pre-earnings run-ups that were skipped, showed losses for this strategy, in other words -- the technical safety valve is working.
During this period where the strategy returned 332%, Facebook stock was up just 10.2%.
Setting Expectations
While this strategy had an overall return of 332%, the trade details keep us in bounds with expectations:➡ The average percent return per trade was 42.9% over each week.
RESULTS
Here are the results over the last year in Facebook: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).
This is particularly interesting because Facebook stock is down 26.7% in this time period while a back-test that triggered for a total of 14-days is up 96.5%. Here is a PnL chart of this time period, where the option strategy is in blue, and the stock is in gray.
Checking the Moving Average
As of this publication date, the stock price is just above the technical requirement:
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.
WHAT HAPPENED
Use science.Tap here to see it for yourself
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.