Roku Inc (NASDAQ:ROKU) : Pre-earnings Momentum Trade With a Technical Trigger
Date Published: 2019-07-06
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.
PrefaceIf we looked one week before earnings in Roku Inc, we can see that three of the last four cycles showed the stock above the 50-day simple moving average. That technical requirement has then triggered a bullish pre-earnings momentum trade which as won all three times, yielding over 130% in less than 20 total days of trading. Today we look at the pattern, and prepare for the next event.
While Roku is not scheduled to release earnings until early August, now is a good time to set an alert for the date and technical requirement -- we'll let Trade Machine let us know if there is a trigger.
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.
The Bullish Option Trade Before Earnings in Roku Inc (NASDAQ:ROKU)We will examine the outcome of getting long a weekly call option in Roku Inc 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, which are the same over the last single year in Roku Inc:
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 9 pre-earnings attempts. In other words -- it's working.
We see a 138.7% return, testing this over the last 3 earnings dates in Roku Inc. That's a total of just 21 days (7-days for each earnings date, over 3 earnings dates). This has been the results of following the trend of bullish sentiment into earnings while avoiding the actual earnings result.
Setting ExpectationsWhile this strategy had an overall return of 138.7%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 42.49%.
Checking the Moving AverageYou can check to see if the 50-day MA for ROKU is above or below the current stock price by using the plot on MovingAverages.com, which is a real-time, adjusted close moving average engine made free for public use by CMLviz.com.
WHAT HAPPENEDIf you trade options, try pattern recognition. Tap here to learn more.
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.