Pre-earnings Momentum Trade With a Technical Trigger in Johnson Controls International PLC
Johnson Controls International PLC (NYSE:JCI) : Pre-earnings Momentum Trade With a Technical Trigger
Date Published: 2021-04-25
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.Preface
There is a bullish momentum pattern in Johnson Controls International PLC 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 strategy won't work forever, but for now it is a momentum play that has not only returned 233.5%, but has also shown a win-rate of 75%.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.
LOGIC
The logic behind the option trading test is easy to understand -- in a any 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. That phenomenon has been well documented by Capital market Laboratories in our seminal webinar on market patterns.That is, totally irrespective of the reality that follows -- that is, irrespective of whether the stocks have a history of actually rising after earnings. There has been a way to profit from this pattern without taking any formal earnings risk in Johnson Controls International PLC.
The Bullish Option Trade Before Earnings in Johnson Controls International PLC (NYSE:JCI)
We will examine the outcome of getting long a weekly call option in Johnson Controls International PLC 7-days before earnings (using calendar days) and selling the call before the earnings announcement if and only if this technical analysis condition is met: 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 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 over the last three-years in Johnson Controls International PLC:| JCI: Long 40 Delta Call | |||
| % Wins: | 75% | ||
| Wins: 6 | Losses: 2 | ||
| % Return: | 233.5% | ||
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).
Notice that while this is a 3-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 4 pre-earnings attempts. In other words -- it's working.
We see a 233.5% return, testing this over the last 8 earnings dates in Johnson Controls International PLC. That's a total of just 56 days (7-days for each earnings date, over 8 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 6 times and lost 2 times, for a 75% win-rate and again, that 233.5% return in less than six-full months of trading.
Setting Expectations
While this strategy had an overall return of 233.5%, the trade details keep us in bounds with expectations:➡ The average percent return per trade was 31.21%.
Checking the Moving Average
You can check to see if the 50-day MA for JCI is above or below the current stock price by using the Pivot Points tab on www.CMLviz.com.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 Johnson Controls International PLC
Now we can look at just the last year as well:
| JCI: Long 40 Delta Call | |||
| % Wins: | 66.67% | ||
| Wins: 2 | Losses: 1 | ||
| % Return: | 112.7% | ||
Tap Here to See the Back-test
We're now looking at 112.7% returns, on 2 winning trades and 1 losing trades.
➡ The average percent return over the last year per trade was 35.55%.
WHAT HAPPENED
There's a better way -- try pattern recognition. Tap here to try it for yourselfRisk 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.