Bonanza Creek Energy Inc (NYSE:BCEI) : Powerful Long Put Spreads to Outperform EarningsDate Published: 2017-06-18
We find a very powerful outcome examining long put spreads for Bonanza Creek Energy Inc when we use a clever earnings risk management approach. This is the information that the top 0.1% have and now it's time for us all to see it.
With relative ease we can become experts -- to see the risks we want to take and see those that we want to avoid, which ultimately allows us to optimize our results. This is one of those cases.
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There is a lot less 'luck' involved in successful option trading than many people have come to understand. We can get specific with long put spreads on BCEI in this dossier. Let's look at a two-year back-test of a long put spread strategy and use the following easy rules:
* Test monthly options, which means rolling the put spread every 30-days.
* Avoid holding a position during earnings.
* Study an out of the money put spread -- specifically the 30 delta / 10 delta spread.
* Test the put spread 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.
If we did this 30 delta / 10 delta long put spread in Bonanza Creek Energy Inc (NYSE:BCEI) over the last two-years but always skipped earnings we get these results:
First we note that the long put spread strategy actually produced a higher return than the stock 2,095.0% versus 52.7% or a 2,042.3% out-performance.
Buying a put spread spread every 30-days in BCEI has been a pretty substantial winner over the last two-years returning Even better, the strategy has outperformed the long put spread that was held during earnings. Let's turn to that piece, now.
OPERATING FURTHER WITH BONANZA CREEK ENERGY INC
That initial move -- examining long put spreads while avoiding earnings is clever. It definitely gets us a study ahead of most casual option traders. But we can move our knowledge yet further.
The next move will implement the same back-test rules and deltas, but this time we will only test results during earnings. To be perfectly clear, we test the long put spread that is opened two-days before earnings, lets earnings occur, and then closes the option position two-days after earnings.
Here are those results for the same 30 delta / 10 delta long put spread:
Buying a put spread in Bonanza Creek Energy Inc during was not only a loser, more importantly, it returned less than the same long put spread that avoided earnings. While this clever use of avoiding earnings has outperformed the long put spread that was held during earnings, there's a bigger picture here. Let's turn to that piece, now.
For clarity we chart the stock returns, the long put spread (ps) strategy with earnings and the one that avoids earnings, below.
Bonanza Creek Energy Inc Stock
and Long Puts Spreads %
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 Bonanza Creek Energy Inc and put spreads.