Pre-earnings Momentum Trade With a Technical Trigger in Microsoft Corporation
Microsoft Corporation (NASDAQ:MSFT) : Pre-earnings Momentum Trade With a Technical Trigger
Date Published: 2018-12-27
DisclaimerThe 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.
PrefaceWith the largest single day point gain in the Dow Jones Industrial average, stocks have confirmed wild volatility. Now checking stock prices versus moving averages becomes a valuable check for triggers.
There is a bullish momentum pattern in Microsoft Corporation (NASDAQ:MSFT) stock 7 calendar days before earnings, and we can capture that phenomenon explicitly by looking at returns in the option market.
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. This is a momentum play that has not only returned 367.2%, but has also shown a win-rate of 80%. We are holding a webinar (register here) to discuss the details of three critical trading strategies that have worked across all markets -- this is one of them.
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.
LOGICThe logic behind the option trading backtest is easy to understand -- in an 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 Microsoft Corporation.
You can watch a full video description of this trade, below:
The Bullish Option Trade Before Earnings in Microsoft CorporationWe will examine the outcome of getting long a weekly call option in Microsoft Corporation 7-days before earnings (using calendar days) and selling the call before the earnings announcement if and only if 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.:
RISK MANAGEMENTWe 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.
RESULTSHere are the results over the last three-years in Microsoft Corporation:
|MSFT: Long 40 Delta Call|
|Wins: 8||Losses: 2|
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
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 2 pre-earnings attempts. In other words -- it's working.
We see a 367.2% return, testing this over the last 10 earnings dates in Microsoft Corporation. That's a total of just 70 days (7-days for each earnings date, over 10 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 8 times and lost 2 times, for a 80% win-rate and again, that 367.2% return in less than six-full months of trading.
Setting ExpectationsWhile this strategy had an overall return of 367.2%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 35.12%.
Checking the Moving AverageYou can check to see if the 50-day MA for MSFT 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.
What HappenedA bull market that turns over is not problematic for traders with the right tools -- it's an opportunistic. Become the expert in the room.
Tap Here, See for Yourself
You should read the Characteristics and Risks of Standardized Options.
Past performance is not an indication of future results.
Remember to consider every piece of investment information you receive, not as a de facto recommendation, but as an idea for further consideration. Even the strongest disclosure policy in the world does not excuse individuals from taking responsibility for their own decisions. Due diligence and critical thought are crucial to your financial success.
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.