Procter & Gamble Company (The) (NYSE:PG) : Pre-earnings Momentum Trade With a Technical Trigger
Date Published: 2019-06-23
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.
PrefaceThe market has been led, in part, by industrials. These are the names you see outperforming when a bull market turns. Irrespective of the direction of the market, most the world is hyper focused on tech stocks. Today we look at an opportunity outside of tech that has been quite compelling.
There is a bullish momentum pattern in Procter & Gamble Company (The) stock 7 calendar days before earnings. While this trigger is still about 30-days away, now is the time to set the alert.
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.
Learn ItWe are holding a webinar on June 27th to go over this model and pattern, and several others while posting over 40 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 40 trade candidates in real-time.
LOGICThe logic behind the option trading test 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. Now we can see it in Procter & Gamble Company (The).
The Bullish Option Trade Before Earnings in Procter & Gamble Company (The) (NYSE:PG)We will examine the outcome of getting long a weekly call option in Procter & Gamble Company (The) 7-days before earnings (using calendar days) and selling the call before the earnings announcement if and only if this technical analysis condition is met: 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 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 Procter & Gamble Company (The):
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 6 pre-earnings attempts. In other words -- it's working.
Setting ExpectationsWhile this strategy had an overall return of 183.4%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 28.54%.
Checking the Moving AverageYou can check to see if the 50-day MA for PG 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."
Again, learn more about this pattern during the webinar on June 27th. 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.
Back-testing More Time Periods in Procter & Gamble Company (The)
Now we can look at just the last year as well:
We're now looking at 107.5% returns, on 2 winning trades and 0 losing trades.
➡ The average percent return over the last year per trade was 47.16%.
WHAT HAPPENEDWhile the past is no guarantee of the future, it's all we have. Would you rather trade a strategy that was worked in the past or has not? Tap here to try it for yourself
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.