Pre-earnings Momentum Trade With a Technical Trigger in Workday Inc
Workday Inc (NASDAQ:WDAY) : Pre-earnings Momentum Trade With a Technical Trigger
Date Published: 2019-01-1
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
There is a bullish momentum pattern in Workday Inc (NASDAQ:WDAY) stock 3 trading days before earnings. The only problem is, what if we're not in a bull market anymore?When using structured and empirical technical analysis, history has shown we can avoid opening a bullish position while a stock is in a technical break down, like the fourth quarter of 2018, while jumping on bullish momentum at the other times.
Here is a video of the methodology:
The Bullish Option Trade Before Earnings in Workday Inc
We will examine the outcome of getting long a weekly call option in Workday Inc 3-days before earnings (using trading days) and selling the call before the earnings announcement if and only if 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.:
If the stock price fails the technical requirement, it's fine, we just put a pin in it and check next quarter.
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. 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.
RESULTS
Here are the results over the last three-years in Workday Inc:| WDAY: Long 40 Delta Call | |||
| % Wins: | 80% | ||
| Wins: 8 | Losses: 2 | ||
| % Return: | 122.3% | ||
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 `WDAY` 3 days before earnings
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 2 pre-earnings attempts.
Setting Expectations
While this strategy had an overall return of 122.3%, the trade details keep us in bounds with expectations:➡ The average percent return per trade was 15%.
Checking the Moving Average
You can check to see if the 50-day MA for WDAY is above or below the current stock price by using the Pivot Points tab on www.CMLviz.com.Back-testing More Time Periods in Workday Inc
Now we can look at just the last year as well:
| WDAY: Long 40 Delta Call | |||
| % Wins: | 100.00% | ||
| Wins: 4 | Losses: 0 | ||
| % Return: | 163.3% | ||
Tap Here to See the Back-test
We're now looking at 163.3% returns, on 4 winning trades and 0 losing trades.
➡ The average percent return over the last year per trade was 44.08% in each 3-day period.
Note that the implication is that even in the December earnings release -- the 3-days prior was a winning bullish trade, even in the face a bear market.
WHAT HAPPENED
This is how people profit from the option market, its empirical testing, not luck.Tap here to see it 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.