The One-Week Pre-earnings Momentum Trade With Options in Guidewire Software Inc
Guidewire Software Inc (NYSE:GWRE) : The One-Week Pre-earnings Momentum Trade With Options
Date Published: 2018-08-26
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
While hardware tech gems like Applied Materials and Micron have hit a bit of a slow down, the software segment of technology has been doing quite well, with several high profile names making new all-time highs. See Veeva Systems (VEEV), Twilio (TWLO), Salesforce (CRM) and Palo Alto Network (PANW), to name a few. Now it's time took at another.Guidewire Software Inc (NYSE:GWRE) has been on a tear. Here is a stock chart dating back to January 2017:
It turns out that there has been that same bullish momentum pattern in the stock 7 calendar days before earnings, that we have looked at so many times before. According to our data provider, Wall Street Horizon, the company has earnings due out on 2018-09-05, after the market closes, and seven days before then would be 8-29-2018.
The strategy won't work forever, but for now it is a momentum play that has not only returned 342%, but has also shown a win-rate of 83% over the last 3-years.
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.
The Bullish Option Trade Before Earnings in Guidewire Software Inc
We will examine the outcome of getting long a two-week out of the money (40 delta) call option in Guidewire Software Inc 7-days before earnings (using calendar days) and selling the call 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.
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 going back to 2015-08-01 in Guidewire Software Inc:| GWRE: Long 40 Delta Call | |||
| % Wins: | 83% | ||
| Wins: 10 | Losses: 2 | ||
| % Return: | 307.6% | ||
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 `GWRE` 7 days before earnings
We see a 307.6% return, testing this over the last 12 earnings dates in Guidewire Software Inc. That's a total of just 84 days (7-days for each earnings date, over 12 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 10 times and lost 2 times, for a 83% win-rate and again, that 307.6% 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 307.6%, the trade details keep us in bounds with expectations:➡ The average percent return per trade was 32%.
➡ The average percent return per winning trade was 42%.
➡ The average percent return per winning trade was -18.1%.
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 Guidewire Software Inc
Now we can look at just the last two pre-earnings earnings periods as well:
| GWRE: Long 40 Delta Call | |||
| % Wins: | 100% | ||
| Wins: 2 | Losses: 0 | ||
| % Return: | 131% | ||
Tap Here to See the Back-test
We're now looking at 82.2% returns, on 2 winning trades and 2 losing trades.
➡ The average percent return over the last six-months per trade was 59.2%.
WHAT HAPPENED
In a few mouse clicks and about 30 seconds, we identified a pattern that has repeatedly turned a profit over and over again.Tap Here, See 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.