Jumping on Patterned Volatility Before Earnings in Regeneron Pharmaceuticals Inc
Regeneron Pharmaceuticals Inc (NASDAQ:REGN) : Side-Stepping Stock Direction Risk in Option Trading Before Earnings
Date Published: 2018-06-21
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.
Preface
Sometimes it doesn't mater if we can identify a bull or bear market, we want to identify repeating patterns of volatility. That's exactly what we have found in Regeneron Pharmaceuticals Inc (NASDAQ:REGN) time after time after time.
Here is a two-year stock chart. Pay close attention to the periods 14-days before the earnings events (denoted by the blue "E" icon):
It turns out, over the long-run, for stocks with certain tendencies like Regeneron, there is a clever way to trade market anxiety or market optimism before earnings announcements with options.
The Trade Before Earnings: When it Works
What a trader wants to do is to see the results of buying a slightly out of the money strangle (40 delta) two-weeks before earnings using the monthly options, and then sell that strangle just before earnings.
If the stock is volatile during this period, this generally is a winning strategy, if it does not move, this strategy will likely not be profitable and the complete back-test below discusses that possibility.
Here is the setup:
We are testing opening the position 14 calendar 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:
RISK MANAGEMENT
We can add another layer of risk management to the back-test by instituting and 40% stop loss and a 40% limit gain. If the stock doesn't move a lot during this period and the options begin to decay in value, a stop loss can prevent a total loss.
On the flip side, if the stock does move in one direction or another enough, the trade can be closed early for a profit. Here are those settings:
In English, at the close of each trading day we check to see if the total position is either up or down 40% relative to the open price. If it was, the trade was closed.
Returns
If we did this long strangle in Regeneron Pharmaceuticals Inc (NASDAQ:REGN) over the last two-years but only held it before earnings we get these results:
| REGN Long 40 Delta Strangle |
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| % Wins: | 87.5% | ||
| Wins: 7 | Losses: 1 | ||
| % Return: | 240% | ||
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 `REGN` 14 days before earnings
Setting Expectations
While this strategy has an overall return of 240%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 29% over 13-days.
➡ The average percent return per winning trade was 36.4% over 13-days.
➡ The percent return for the losing trade was -22.5 over 13-days.
Option Trading in the Last Year
We can also look at the last year of earnings releases and examine the results:
| REGN Long 40 Delta Strangle |
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| % Wins: | 100.00% | ||
| Wins: 4 | Losses: 0 | ||
| % Return: | 120% | ||
➡ Over just the last year, the average percent return per trade was 36.8% for each 13-day trade.
WHAT HAPPENED
There's a lot less luck to successful option trading than many people realize. Empirical, objective and explicit results can reveal patterns that show successful trades over and over again.
To see how to do this for any stock we welcome you to watch this quick demonstration video:
Tap Here to See the Tools at Work
Thanks for reading.
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.