Option Backtester Pre-earnings Momentum Trade With a Technical Trigger in NVIDIA Corporation
Stock Option Backtester NVIDIA Corporation (NASDAQ:NVDA) : Pre-earnings Momentum Trade With a Technical Trigger
Date Published: 2019-02-06
Disclaimer
The 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.Preface
There is a bullish momentum pattern in NVIDIA Corporation (NASDAQ:NVDA) stock 7 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. We'll keep it simple -- the stock must hold above the 50-day moving average one week before earnings, or this back-test does not trigger.Nvidia next has earnings due out on 2-14-2019, and seven-days before then would be 2-7-2019, near the market close. We do note that breaking trade deal news is pushing markets lower inluding a report that states the U.S. and China will not come to agreement before the deadline passes for a ratcheting up of tariffs. In this new world, suddenly politics is more important than market mechanics.
Risk Alert: Nvidia pre-announced an awful miss of revenue just a few weeks ago and that took the stock down. There is a risk now that with the bad pre-announcement, all of the patterns of optimism before earnings could be thrown off since the company essentially said out loud, "we're not optimistic." Just be aware of the company news.
The Bullish Option Trade Before Earnings in NVIDIA Corporation
We will examine the outcome of getting long a weekly call option (using 40 delta as the strike price) in NVIDIA 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.:
Here's a visual representation, where the stock price 7-days before earnings (circled) is above the 50-day moving average (black line), and therefore triggers a back-test.
If the stock price fails the technical requirement, it's fine, we just put a pin in it and check next quarter.
RISK MANAGEMENT
We can add another layer of risk management to the back-test by instituting and 30% stop loss and a 30% 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 30% relative to the open price. If it was, the trade was closed.
RESULTS FROM THE OPTION BACKTESTER
Here are the results over the last five-years in NVIDIA Corporation:| NVDA: Long 40 Delta Call | |||
| % Wins: | 75% | ||
| Wins: 12 | Losses: 4 | ||
| % Return: | 490% | ||
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).
Notice that while this is a 5-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 4 pre-earnings attempts. In other words -- it's working.
We can also see that this strategy hasn't been a winner all the time, rather it has won 12 times and lost 4 times, for a 75% win-rate.
Setting Expectations
While this strategy had an overall return of 490%, the trade details keep us in bounds with expectations:➡ The average percent return per trade was 26.3%.
Checking the Moving Average
You can check to see if the 50-day MA for NVDA is above or below the current stock price by using the Pivot Points tab on www.CMLviz.com.Back-testing More Time Periods in NVIDIA Corporation
Now we can look at just the last year as well:
| NVDA: Long 40 Delta Call | |||
| % Wins: | 100.00% | ||
| Wins: 2 | Losses: 0 | ||
| % Return: | 123% | ||
Tap Here to See the Back-test
We're now looking at 123% returns, on 2 winning trades and 0 losing trades -- noting that the last pre-earnings run up was avoided entirely due to the technical safety valve
➡ The average percent return over the last year per trade was 62%.
Discovery
We found this trade using the Scan Tab in Trade Machine. We stated by looking at the Nasdaq 100:
Then looked at the "7 Days Pre, Long Call Technical" scan under the "Pre-Earnings" section:
We sorted on the number of wins, and viola, Nvidia was at the top. We then changed the stop/limit to 30% instead of the default 40%, to tighten up the risk controls. That's it... four mouse clicks.
WHAT HAPPENED: Option Backtester
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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.