Model N Inc (NYSE:MODN) : The Exact Trigger that Indicates Volatility
Date Published: 2019-04-01
DisclaimerThe 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.
PrefaceThere is a trigger in Model N Inc that has preceded a large stock move and that move has created a powerful option trading opportunity in the past. The strategy won't work forever, but for now it is a volatility back-test that has not only returned 115.1%, but has also shown a win-rate of 67% while taking no stock direction risk.
Simply owning puts and calls together, like a straddle or a strangle, can be a huge winner, as it was at the end of 2018. But, equally, it has been a huge losing strategy outside of that time frame. So, the need has arisen -- an empirical and structured trigger that indicates when a large stock move is coming so owning a strangle has a higher probability of succeeding.
There is such a technical condition, and we will review it, right now.
Here is a quick 3 minute video that demonstrates the back-test:
The Short-term Option Volatility Trade in Model N Inc (NYSE:MODN)It's time to take advantage of volatility. Fear, uncertainty, doubt, unclear news headlines -- these are all trade-able events. Today we look at exactly what has worked in MODN, and the special technical analysis trigger that starts it off.
We will examine the outcome of going long a short-term out-of-the-money (40 delta) strangle (buying an out of the money call and buying an out of the money put), in options that are the closest to 14-days from expiration. But we follow three rules:
* Never Trade Earnings
Let's not worry about stock direction or earnings, let's try to find a back-test that benefits from volatility. Here it is, first, we enter the long strangle.
* Use a technical trigger to start the trade, specifically:
Wait until the day that the stock price crosses below the 200-day moving average and the stock price is below the 10-day moving average. Here is a nice simple image of the technical requirement:
* Finally, we set a very specific type of limit:
* Use a 20% limit
* Close the trade after 10 days, if the limit has not been hit.
At the end of each day, the back-tester checks to see if the long strangle is up 20%. If it is, it closes the position. If after 10-days the limit has not been hit, the strangle is closed so not to suffer total time decay.
RESULTSHere are the results over the last three-years in Model N Inc:
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 can also see that this strategy hasn't been a winner all the time, rather it has won 4 times and lost 2 times, for a 67% win-rate and again, that 115.1% return in less than six-full months of trading.
Setting ExpectationsWhile this strategy had an overall return of 115.1%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 33.66%.
Checking the Moving AverageYou can check to see the moment a stock dips below the 200-day MA for MODN on the Pivot Points tab on www.CMLviz.com.
Back-testing More Time Periods in Model N IncNow we can look at just the last year as well:
We're now looking at 34% returns, on 1 winning trades and 0 losing trades.
➡ The average percent return over the last year per trade was 34.29%.
WHAT HAPPENEDThere's a better way -- try pattern recognition. Tap here to try it for yourself.
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.
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