The Repeating Pattern in Alphabet Inc That Triggers Right After an Earnings Beat and The Option Trade That Follows
Alphabet Inc (NASDAQ:GOOGL) : The Repeating Pattern in Alphabet Inc That Triggers Right After an Earnings Beat and The Option Trade That Follows
Date Published: 2019-07-25
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.LEDE
There is a bullish momentum pattern in Alphabet Inc (NASDAQ:GOOGL) stock 1 trading day after earnings, if and only if the stock showed a large gap up after the actual earnings announcement.This is a conditional entry -- the company reports earnings and 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 in a short window to follow. The event is rare, but when it has occurred, the back-test results are noteworthy.
Since GOOGL just reported earnings on 7-25-2019, this trade would trigger 7-26-2019.
The results we're about to see are very good, but there is one thing about this backtest that is usually a critical weakness when it appears: This hasn't triggered in over a year, and that should at the very least be said out loud.
Finally, note that will all Trade mMchine backtests, this would open if and only if GOOGL is up 3% or more near the end of the day on 7-26-2019. The implied volatility will likely dip as the day moves forward, so an end of day entry could be crucial. This also is not an one-day trade -- it make take patience.
Alphabet Inc (NASDAQ:GOOGL) Earnings
In Alphabet 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.
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
* 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 Alphabet Inc (NASDAQ:GOOGL) 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).
Looking at Averages
The overall return was 242%; but the trade statistics tell us more with average trade results:➡ The average return per trade was 46.98% over each 13-day period.
➡ The average return per winning trade was 46.98% over each 13-day period.
WHAT HAPPENED
Want to know which companies see a rip follow up after an earnings beat? We do too. That's why it's one of our many scans in Trade Machine.Tap here to learn about becoming a Trade Machine.
Risk Disclosure
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.
You should read the Characteristics and Risks of Standardized Options.