Children's Place Inc (The) (NASDAQ:PLCE) : Avoid Bear Market Risk: The Secret to Option Trading Before Earnings
Date Published: 2018-08-08
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.
PrefacePre-earnings straddles and strangles hold a special place in the back-testing of option trades in that these strategies tend to show quite contained loss profiles due to the nature of the position, and for the right stocks, rather large gain profiles. We see this exact phenomenon in Children's Place Inc (The) (NASDAQ:PLCE), and it's well worth a look.
The Trade Before EarningsWhat a trader wants to do is to see the results of buying an at out of the money strangle (40 delta) a few days before earnings, and then sell that strangle just before earnings.
The goal is to benefit from a unique and very short time frame when the stock might move 'a lot', either due to earnings anxiety (stock drops before earnings) or earnings optimism (stock rises before earnings), but taking no actual earnings risk.
The analysis also tends to benefit from the unique period where time decay slows due to earnings and that combined with a non-directional position can create a nice risk profile.
Here is the setup:
We are testing opening the position 5 trading days before earnings and then closing the position 1 day before earnings. This is not making any earnings bet. This is not making any stock direction bet.
Once we apply that simple rule to our back-test, we run it on an out-of-the-money strangle:
If we did this long out-of-the-money strangle, using two-week options, in Children's Place Inc (The) (NASDAQ:PLCE) over the last two-years but only held it before earnings we get these results:
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).
We see a 799% return, testing this over the last 8 earnings dates in Children's Place Inc (The).
We can also see that this strategy hasn't been a winner all the time, rather it has won 7 times and lost once.
Setting ExpectationsWhile this strategy has an overall return of 206.9%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 69.2%.
➡ The average percent return per winning trade was .
➡ The percent return for thee losing trade was .
MOVING FORWARDIn a few mouse clicks and about 30 seconds, you can identify a pattern that has repeatedly turned a profit over and over again, then see those results with no room for confusion or doubt. You can tap the link below to become your own option expert.
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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.