Microsoft Corporation (NASDAQ:MSFT) : Pre-earnings Momentum Trade With a Technical Trigger
Date Published: 2019-06-19
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 bullish momentum pattern in MSFT stock 14 calendar days before earnings. 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.
RecentlyThe last time the trigger we are about to cover fired was on April 10th, 2019. The May10'19 123 Calls were opened for $1.91.
On April 18th, 2019, those same calls closed at $3.05, for a 59% return. Here is a screen grab from the Trade Machine software.
Now, let's see it in action not for one backtest, or one year, but five-years.
Learn ItWe are holding a webinar on June 27th to go over this model and pattern, and several others while posting over 30 actual trade set ups in real time. Please feel free to register for the webinar (it's free):
Webinar: The five most powerful triggers, identifying more than 30 trade candidates in real-time.
The Bullish Option Trade Before Earnings in Microsoft Corporation (NASDAQ:MSFT)We will examine the outcome of getting long a 30 day monthly call option in Microsoft Corporation 14-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.
There is no verified earnings date yet for MSFT, but Wall Street Horizon has a unverified estimate of 7-18-2019. Set an alert in Trade Machine and get notified if the company verifies its earnings date in time. As of now, we can roughly estimate this trade would trigger on 7-4-2019, and since that's a holiday, it would open 7-5-2019. But, we need to wait for Trade Machine to notify us of an official date.
Here's the set-up in great clarity; again, note that the trade closes before earnings since MSFT reports after the market closes, so this trade does not make a bet on the earnings result.
And here is the technical analysis requirement -- note only one is "turned on," and that is the 50-day moving average requirement.:
If the stock price fails the technical requirement, it's fine, we just put a pin in it and check next quarter. Even better, we can set an intra day alert in Trade Machine that will email and/or text you when both requirements are met, just like this:
RISK MANAGEMENTWe can add another layer of risk management to the option trading 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 five-years in Microsoft Corporation:
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).
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.
Setting ExpectationsWhile this strategy had an overall return of 1209%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 45.5% per two-week period.
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.
Back-testing More Time Periods in Microsoft Corporation
Now we can look at just the last year as well:
➡ The average percent return over the last year per trade was 69.1%.
WHAT HAPPENEDFind winning option trades. Try pattern recognition.
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.
You should read the Characteristics and Risks of Standardized Options.