The One-Week Pre-earnings Momentum Trade With Options in Marvell Technology Group Ltd.
Marvell Technology Group Ltd. (NASDAQ:MRVL) : The One-Week Pre-earnings Momentum Trade With Options
Date Published: 2018-05-21Disclaimer
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 Marvell Technology Group Ltd. (NASDAQ:MRVL) stock 7 calendar days before earnings that has been remarkably consistent, and we can capture that phenomenon explicitly by looking at returns in the option market.
According to Wall Street Horizon, the next earnings date for MRVL is due out 2018-05-31 after the market closes. 7-days before then would be 5-24-2018 near the market close.
The Bullish Option Trade Before Earnings in Marvell Technology Group Ltd.
We will examine the outcome of getting long a weekly call option in Marvell Technology Group Ltd. 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 on the day of earnings, but since MRVL reports after the market close, this 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 Marvell Technology Group Ltd.:
| MRVL: Long 40 Delta Call | |||
| % Wins: | 87.5% | ||
| Wins: 7 | Losses: 1 | ||
| % Return: | 689% | ||
Tap Here to See the Back-test
The mechanics of the TradeMachine™ 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 `MRVL` 7 days before earnings
We see a 689% return, testing this over the last 8 earnings dates in Marvell Technology Group Ltd. That's a total of just 64 days (8-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 7 times and lost 1 time.
Setting Expectations
While this strategy had an overall return of 305.2%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 55.5% over each 8-day period.
➡ The average percent return per winning trade was 70.5% over each 8-day period.
➡ The percent return for the losing trade was -50% over each 8-day period.
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 Marvell Technology Group Ltd.
Now we can look at just the last year as well:
| MRVL: Long 40 Delta Call | |||
| % Wins: | 100.00% | ||
| Wins: 4 | Losses: 0 | ||
| % Return: | 261% | ||
Tap Here to See the Back-test
We're now looking at 200% returns, on 4 winning trades and 0 losing trades.
➡ The average percent return over the last year per trade was 56.6% over each 8-day period.
We do note how similar that 56.6% historical average return is relative to the 55.5% historical return when looking over two-years.
WHAT HAPPENED
There's a lot less luck to successful option trading than most people realize and this is it -- this is how people profit from the option market.
To find the best performing historical momentum, technical analysis or non-directional trades we welcome you to watch this quick demonstration video:
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.