The Volatility Pattern After Earnings in PayPal Holdings
PayPal Holdings Inc (NASDAQ:PYPL) : The Volatility Pattern After Earnings in PayPal Holdings
Date Published: 2018-09-05
Disclaimer
The 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.LEDE
This is a slightly advanced option trade that looks for volatility for a period that starts one-day after PayPal Holdings Inc (NASDAQ:PYPL) earnings and lasts for the 6 calendar days to follow, that has been a winner for the last 3 years. We note the use of strict risk controls in this analysis.According to our data provider Wall Street Horizon, PayPal has its next earnings due out on 2018-10-18 after the market closes.
PayPal Holdings Inc (NASDAQ:PYPL) Earnings
In PayPal Holdings Inc, irrespective of whether the earnings move was large or small, if we waited one-day after earnings and then back-tested going long an one-week strangle (using two-week options), the results were quite strong. This back-test opens one-day after earnings were announced to try to find a stock that moves a lot after the earnings announcement.Simply owning options after earnings, blindly, is likely not a good back-test, but hand-picking the times and the stocks to do it in can be useful. We can test this approach without bias with a custom option back-test. Here is the timing set-up around earnings:
Rules
* Open the long out-of-the-money (40 delta) strangle one-calendar day after earnings.* Close the strangle 7 calendar days after earnings.
* Use the options closest to 14 days from expiration (but more than 7 days).
This is a straight down the middle volatility test -- this back-test wins if the stock is volatile the week following earnings and it will stand to lose if the stock is not volatile. This is not a silver bullet -- it's a back-test that needs to be carefully examined.
But, this is a stock direction neutral strategy, which is to say, it wins if the stock moves up or down -- it just has to move.
RISK CONTROL
Since blindly owning volatility can be a quick way to lose in the option market, we will apply a tight risk control to this analysis as well. We will add a 40% stop loss and a 40% limit gain.
In English, at the close of every trading day, if the strangle is up 40% from the price at the start of the trade, it gets sold for a profit. If it is down 40%, it gets sold for a loss. This also has the benefit of taking profits if there is volatility early in the week rather than waiting to close 7-days later.
Another risk reducing move we made was to use 14-day options and only hold them for 7-days so the trade doesn't suffer from total premium decay.
RESULTS
If we bought the out-of-the-money (40 delta) strangle in PayPal Holdings Inc (NASDAQ:PYPL) over the last three-years but only held it after earnings we get these results:| PYPL Long out-of-the-money (40 delta) strangle |
|||
| % Wins: | 67% | ||
| Wins: 8 | Losses: 4 | ||
| % Return: | 342% | ||
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 `PYPL` 1 days after earnings
We see a 342% return, testing this over the last 12 earnings dates in PayPal Holdings Inc. That's a total of just 72 days (6 days for each earnings date, over 12 earnings dates).
Looking at Averages
The overall return was 342%; but the trade statistics tell us more with average trade results:➡ The average return per trade was 25.7% over 6-days.
➡ The average return per winning trade was 53% over 6-days.
➡ The average return per losing trade was -29% over 6-days.
Looking at the Last Year
While we just looked at a multi-year back-test, we can also hone in on the most recent year with the same test:Now we see a 123.2% return over the last year and a 75% win-rate.
➡ The average return for the last year per trade was 50.9% over 6-days.
➡ The average return for the last year per winning trade was 74% over 6-days.
➡ The average return per losing trade was -18.3% over 6-days.
What Happened
In a few mouse clicks and about 30 seconds, we empirically identify a pattern that has repeatedly turned a profit over and over again, then displayed those results with no room for confusion or doubt. You can tap the link below to become your own option expert.Tap Here, See for Yourself
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.