Prudential Financial Inc (NYSE:PRU) : Intelligent Options Trading: Right After EarningsDate Published: 2017-06-16
This is a simple option trade that starts two-days after Prudential Financial Inc (NYSE:PRU) earnings and lasts for the one month to follow, that has been a winner for 3 straight years.
Prudential Financial Inc (NYSE:PRU) Earnings
While the mainstream media likes to focus on the actual earnings move for a stock, that's the distraction when it comes to the option market.
For Prudential Financial Inc, irrespective of whether the earnings move was up or down, if we waited two-days after the stock move, and then sold a one-month out of the money put spread, the results were simply staggering. We use two-days to allow the stock to fully reach equilibrium post earnings.
We can examine this intelligent approach, objectively, with a custom option back-test. Here is our earnings set-up:
* Open short put spread 2-days after earnings
* Close short put spread 29 days later
* Use the 30-day options
If we sold this 30/10 delta out-of-the-money put spread in Prudential Financial Inc (NYSE:PRU) over the last three-years but only held it after earnings we get these results:
We see a 76.5% return, testing this over the last 12 earnings dates in Prudential Financial Inc. That's a total of just 336 days (28 days for each earnings date, over 12 earnings dates).
We can also see that this strategy hasn't been a winner all the time, rather it has won 10 times and lost 2 times, for a 83% win-rate.
MORE TO IT THAN MEETS THE EYE
While a short put spread is a strategy that gains profits if the underlying stock "doesn't go down a lot," there is more to this with Prudential Financial Inc.
What we're after with this approach is identifying companies that make their large stock move the day after earnings -- whether that's up or down -- and after that, find a sense of equilibrium in the stock price for the next month. This is what we find in Prudential Financial Inc (NYSE:PRU) .
We can see that this idea has been a winner more times than it has been a loser -- a 83% win-rate. It's that positive win-rate that has created that large 83% annualized return.
Traders that have a plan guess less. This is how people profit from the option market. Take a reasonable idea or hypothesis, test it, and apply lessons learned.