The One-Week Pre-earnings Momentum Trade With Options in Lockheed Martin Corporation
Lockheed Martin Corporation (NYSE:LMT) : The One-Week Pre-earnings Momentum Trade With Options
Date Published: 2018-07-17
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 Lockheed Martin Corporation (NYSE:LMT) stock 7 calendar days before earnings, and we can capture that phenomenon explicitly by looking at returns in the option market. We also recently wrote about another defense oriented company, Boeing, earlier in the week, The One-Week Pre-earnings Momentum Trade Just Got Some News to Back It.LMT has earnings due out on 2018-07-24 before the market opens, according to Wall Street Horizon, and one-week before then would be 2018-07-17.
The strategy won't work forever, but is has shown a win 7 of the last 8 pre-earnings cycles. One note of caution, LMT missed earnings badly last quarter and the stock dropped hard. While there has been a rebound, historically, if the prior quarter was an earnings miss, it has dampened the strength of the next quarter's pre-earnings momentum.
Here's a quick six-month chart:
The Bullish Option Trade Before Earnings in Lockheed Martin Corporation
We will examine the outcome of getting long a weekly call option in Lockheed Martin Corporation 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 over the last two-years in Lockheed Martin Corporation:| LMT: Long 40 Delta Call | |||
| % Wins: | 87.5% | ||
| Wins: 7 | Losses: 1 | ||
| % Return: | 252% | ||
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 `LMT` 7 days before earnings
Setting Expectations
While this strategy had an overall return of 252%, the trade details keep us in bounds with expectations:➡ The average percent return per trade was 34.6%.
➡ The average percent return per trade was 45.5%.
➡ The average percent return per trade was -41.9%.
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 powerful for it.
Back-testing More Time Periods in Lockheed Martin Corporation
Now we can look at just the last six-months as well:We're now looking at 159% historical returns, on 2 winning trades.
➡ The average percent return over the last year per trade was 78.9%.
WHAT HAPPENED
You can guess stock direction -- guess momentum -- guess anything. Or, you can be empirical. But there's a lot less luck to successful option trading than that -- and every professional trader knows it. To learn more watch this quick demonstration video -- the first 70 seconds alone could change your view of trading, forever:Tap Here to See the Tools at Work
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.