The Volatility Option Trade After Earnings in FedEx Corporation
FedEx Corporation (NASDAQ:FDX) : The Volatility Option Trade After Earnings
Date Published: 2018-12-15
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
With the bull gone and a bear market in sight, let's look at successful option strategies that trigger off of an earnings miss. If FedEx doesn't move down off of the earnings result, no problem, we'll put a pin in this back-test and revisit it next quarter.This is a slightly advanced option trade that bets on volatility for a period that starts one-day after FedEx Corporation (NASDAQ:FDX) earnings and lasts for the 6 calendar days to follow, that has been a winner for the last 5 years and 1 year. We note the use of strict risk controls in this analysis.
FedEx Corporation (NASDAQ:FDX) Earnings
In FedEx Corporation, if the move off of earnings was down, even the slightest amount, if we waited one-day after earnings and then back-tested going long an one-week straddle (using two-week options), the results were quite strong. This trade opens one-day after earnings were announced to try to find a stock that moves a lot after the earnings announcement.Simply owning options after earnings, blindly, is likely not a good trade, but hand-picking the times and the stocks to do it in can be useful. We can test this approach without bias with a custom option back-test. Here is the timing set-up around earnings:
Rules
* Only trigger a back-test if the stock is down the day after earnings.* Open the long at-the-money straddle one-calendar day after earnings.
* Close the straddle 7 calendar days after earnings.
* Use the options closest to 14 days from expiration (but more than 7 days).
This is a straight down the middle volatility bet -- this trade wins if the stock is volatile the week following earnings and it will stand to lose if the stock is not volatile. This is not a silver bullet -- it's a trade that needs to be carefully examined.
But, this is a stock direction neutral strategy, which is to say, it wins if the stock moves up or down -- it just has to move.
RISK CONTROL
Since blindly owning volatility 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 25% stop loss and a 25% limit gain.
In English, at the close of every trading day, if the straddle is up 25% from the price at the start of the trade, it gets sold for a profit. If it is down 25%, it gets sold for a loss. This also has the benefit of taking profits if there is volatility early in the week rather than waiting to close 7-days later.
Another risk reducing move we made was to use 14-day options and only hold them for 7-days so the trade doesn't suffer from total premium decay.
RESULTS
If we bought the at-the-money straddle in FedEx Corporation (NASDAQ:FDX) over the last five-years but only held it after earnings we get these results:| FDX Long At-the-Money Straddle |
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| % Wins: | 70% | ||
| Wins: 7 | Losses: 3 | ||
| % Return: | 331% | ||
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).
Track this trade idea. Get alerted for ticker `FDX` 1 days after earnings
We see a 331% return, testing this over the last 20 earnings dates in FedEx Corporation, with 10 triggers.
Looking at Averages
The overall return was 331%; but the trade statistics tell us more with average trade results:➡ The average return per trade was 22.5% over 6-days.
➡ The average return per winning trade was 41.8% over 6-days.
➡ The average return per losing trade was -22.7% over 6-days.
Note that since stocks can gap from one day to the other, the average return per winning trade is substantially larger than the limit of 25%, but the average loss is in line with the stop loss of 25%. That is the benefit of having a straddle -- a large stock move helps the strategy.
RESULTS - 1 YEAR
If we tested this long at-the-money straddle in FedEx Corporation (NASDAQ:FDX) over the last years but only held it after earnings if the stock was down, we get these results:| FDX Long At-the-Money Straddle |
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| % Wins: | 66.7% | ||
| Wins: 2 | Losses: 1 | ||
| % Return: | 120% | ||
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).
We now see a 120% return, testing this over the last 4 earnings dates in FedEx Corporation, with 3 triggers.
Looking at Averages
The overall return was 120%; but the trade statistics tell us more with average trade results:➡ The average return per trade was 39.1% over 6-days.
➡ The average return per winning trade was 69.2% over 6-days.
➡ The average return per losing trade was -21.1% over 6-days.
WHAT HAPPENED
This is how people profit from the option market, its empirical testing, not luck.Tap here to try 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.