Jumping on Patterned Volatility Before Earnings in DENTSPLY SIRONA Inc
DENTSPLY SIRONA Inc (NASDAQ:XRAY) : Jumping on Patterned Volatility Before Earnings
Date Published: 2018-10-08
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
As we looked at with Intel, volatility is tradable and in Nasdaq 100 component DENTSPLY SIRONA Inc (NASDAQ:XRAY), it has been tradable, and profitable during the bull market and during the Great Recession.
It turns out, over the long-run, for stocks with certain tendencies like XRAY, 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 an at the money straddle two-weeks before earnings, and then sell that straddle 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 with 30-day options, starting 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 at-the-money straddle:
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 at-the-money straddle in XRAY over the last two-years but only held it before earnings we get these results:
| XRAY Long At-the-Money Straddle |
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| % Wins: | 100% | ||
| Wins: 8 | Losses: 0 | ||
| % Return: | 269% | ||
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 `XRAY` 14 days before earnings
Setting Expectations
While this strategy has an overall return of 310.0%, the trade details keep us in bounds with expectations:➡ The average percent return per trade was 31.8% over 13-days.
Option Trading During the Great Recession
We can also look at the same strategy, but during the Great Recession.
| XRAY Long At-the-Money Straddle |
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| % Wins: | 85.7% | ||
| Wins: 6 | Losses: 1 | ||
| % Return: | 155% | ||
Tap Here to See the Back-test
Volatility has been tradable in XRAY during both the bull and bear markets.
TRADE DISCOVERY
Three clicks, and 30 seconds, led us to this scan, and this result, in Trade Machine:
Click the Scan
See the Results
WHAT HAPPENED
A volatile market can mean opportunity, not fear. This is how people profit from the option market. Take a reasonable idea or hypothesis, test it, and apply lessons learned.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.