Date Published: 2017-05-01
Written by Ophir Gottlieb
Correction: This article previously discussed a trade after earnings that began one-day after earnings. That was incorrect, we are looking at a trade that begins two-days after earnings.
LEDE
While all the focus is on Apple (NASDAQ:AAPL) earnings, the really serious opportunity in the option market is actually after earnings.
APPLE INC AFTER EARNINGS
Apple (NASDAQ:AAPL) has a tendency after earnings to trail off. That is, the stock tends to move in one direction or the other for the following month, and that makes for a wonderful opportunity with options.
We can examine this, objectively, with a custom back-test. Here is our custom earnings set-up:
Said plainly, we will open our position two-days after earnings, and close it 30 days after. We after testing using the 30-day options (monthly option) and we are buying the at-the-money (also called the "50 delta") straddle.
Here are the results over the last three-years:
That's not a typo -- that's 206% over the last three-years, but since we are only testing the one-month following earnings, that 206% return came after just 11-months of a holding period.
We note that the straddle was a winner 5-times, and a loser 7-times. So, this is not a panacea, not a magic bullet, it is objective analysis that has been a giant wealth creator over time.
Using a 5-lot as our example, the average winning trade was $2,517, while the average losing trade was $976.
The trade was a winner about half of the time -- the winners were just much (much) larger than the losers. It's a fair question to ask, or at least the curious mind would want to know, if this strategy actually works over different time periods. Here are the results over the last one-year:
Now we see a 74.7% return over the three earnings releases. The straddle was a winner once, and it was a loser 2-times. Again, the trade was a winner a little less than half the time but the average win was $3380 while the average loss was just $351. This is a strategy, not a one-time gamble.
WHAT HAPPENED
Traders that have a plan guess less. This is how people profit from the option market -- it's preparation, not luck. Take an idea, test it over several periods, note the robustness of the results, and apply lessons learned.
To see how to do this for any stock and for any strategy with just the click of a few buttons, 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.
The author is long shares of Apple (NASDAQ:AAPL) stock as of this writing.
Back-test Link