A Custom Patterned Momentum Signal is About to Trigger in Microsoft
Microsoft Corporation (NASDAQ:MSFT) : A Powerful Patterned Momentum Signal is About to Trigger
Date Published: 2018-06-24
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 there is a bullish momentum pattern in Microsoft Corporation (NASDAQ:MSFT) stock 7 calendar days before earnings, it takes a custom signal adjustment to optimize it. That signal is about to trigger for the tech giant's next earnings release, due out on 7-19-2018, after the market closes.
The Bullish Option Trade Before Earnings in Microsoft Corporation
We will examine the outcome of getting long a two-week call option in Microsoft Corporation 7-days before earnings (using calendar days) and selling the call before the earnings announcement but the back-test is triggered if and only if the prior move off of earnings was positive (the stock moved up the day after earnings).
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 a 3-month Microsoft stock chart, with the "E" icon representing the last earnings date:
We can see that since the prior move off of earnings was positive, that this back-test will now trigger for the earnings that are coming out in July. 7-days before 7-19-2018 is 7-12-2018.
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 Microsoft Corporation:
| MSFT: Custom Long 40 Delta Call | |||
| % Wins: | 100% | ||
| Wins: 5 | Losses: 0 | ||
| % Return: | 321% | ||
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 `MSFT` 7 days before earnings
We see a 321% return, testing this over the last 8 earnings dates in Microsoft Corporation, but only 5 triggered a back-test due to the requirement that the prior earnings move was positive.
Setting Expectations
While this strategy had an overall return of 321%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 51.4%.
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 Microsoft Corporation
Now we can look at just the last year as well -- which has only triggered once.
| MSFT: Custom Long 40 Delta Call | |||
| % Wins: | 100% | ||
| Wins: 1 | Losses: 0 | ||
| % Return: | 51.5% | ||
Tap Here to See the Back-test
WHAT HAPPENED
There's a lot less luck to successful option trading than most people realize. To learn more about empirical option trading 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.