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Trading Options During Earnings in NetScout Systems Inc (NASDAQ:NTCT)




NetScout Systems Inc (NASDAQ:NTCT) : Trading Options During Earnings

Date Published:

PREFACE
We're going to examine buying and selling out of the money strangles in NetScout Systems Inc and find out once and for all what the winning trades have been during earnings releases.

With the right tool kit it's easy to find an explicit answer: Buying out of the money strangles during earnings for NetScout Systems Inc has been a winner. This is the information that the top 0.1% have and now it's time for us all to see it.


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STORY
By definition trading options during earnings is very risky. But, once we step into that world, in turns out that there is a lot less 'luck' involved in successful option trading than many people have come to understand.

We can get specific with long earnings strangles for NTCT in this dossier. Let's look at a two-year back-test of a long 20 strangle only held during earnings. Here are the rules we followed:

* Test monthly options, which means we are not trading the weekly options (we could so if we chose).
* Only hold the position during earnings. Specifically, we test initiating the position two-days before the earnings event, then hold through earnings, and then close two-days after.
* Test the out of the money strangle -- specifically the 20 delta strangle.
* Test the earnings strangle looking back at two-years of history.

More than all the numbers, we simply want to walk down a path that demonstrates that it is actually quite easy to optimize our trades with the right tools. In the set up image below we just tap the rules we want to test.



Next we glance at the returns.

RETURNS
If we did this 20 delta long strangle in NetScout Systems Inc (NASDAQ:NTCT) over the last two-years but only held it during earnings we get these results:

long 20 Delta Strangle
* Monthly Options
* Back-test length: two-years
* Only Earnings
* Holding Period: 4-Days per Earnings Event

Gross Gain: $370
Gross Loss: -$265
Long Earnings Strangle Return:  73.7
Stock Return:  -18.7

Option Out-performance  92.4

We note that while NTCT stock out-performed this earnings strangle, we're looking at just a matter of days of holding period for the options and two-year for the stock.

An earnings event is really just a volatility event that we know is coming ahead of time. What we're really analyzing here is if, historically, the option market has priced the implied stock move too high or too low.

In this case, the option market's implied vol has been lower than the actual stock movement. We can see that a long strangle and only holding the position during earnings in NetScout Systems Inc returned 73.7%. But, there's a much bigger picture here. Let's turn to that piece, now.

CHARTING TO BE CLEAR
To make it clear, we can simply plot the returns of the short and long out of the money earnings strangles, below.


NetScout Systems Inc Earnings / Non-Earnings Strangles %


TRADING TRUTHS
The concept here is straight forward, friends: securing knowledge before entering an option position constructs a mind set about what to trade, when to trade it and even if the trade is worth it at all. Now we can see this practice taken further, beyond NetScout Systems Inc and earnings strangles.