Allison Transmission Holdings Inc (NYSE:ALSN) : Trading Earnings Optimism With OptionsDate Published: 2017-07-16
There is a powerful pattern of optimism and momentum in Allison Transmission Holdings Inc (NYSE:ALSN) stock right before of earnings, and we can capture that pattern by looking at returns in the option market. The strategy won't work forever, but for now it is a momentum play that has not only returned 240% annualized returns, but has also shown a high win-rate of 58%.
The premise is simple -- one of the least recognized but most important phenomena surrounding this bull market is the amount of optimism, or upward momentum, that sets in the two-weeks before an earnings announcement.
That is, totally irrespective of whether the stocks have a history of beating earnings, in the two-weeks before of earnings, several of them tend to rally abruptly into the event. There has been a way to profit from this pattern without taking any actual earnings risk -- and it is very powerful in Allison Transmission Holdings Inc.
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The Options Optimism Trade Before Earnings in Allison Transmission Holdings Inc
Let's look at the results of buying a monthly call option in Allison Transmission Holdings Inc two-weeks before earnings and selling the call before the earnings announcement.
Here's the set-up in great clarity; again, note that the trade closes before earnings, so this trade does not make a bet on the earnings result.
Now, unlike many of our other set-ups, this is in fact a straight down the middle bullish bet -- this absolutely takes on directional stock risk, so let's be conscious of that before we see the results, because they are mind bending.
Here are the results over the last three-years in Allison Transmission Holdings Inc:
We see a 110.5% return, testing this over the last 12 earnings dates in Allison Transmission Holdings Inc. That's a total of just 168 days (14 days for each earnings date, over 12 earnings dates). That's an annualized rate of 240%. That's the power of following the trend of optimism into earnings -- and never even worrying about the actual earnings result.
We can also see that this strategy hasn't been a winner all the time, rather it has won 7 times and lost 5 times, for a 58% win-rate and again, that 110.5% return in less than six-full months of trading.
Checking More Time Periods in Allison Transmission Holdings Inc
Now we can look at just the last year as well:
We're now looking at 520% returns, on 3 winning trades and 1 losing trades. It's worth noting again that we are only talking about two-weeks of trading for each earnings release, so this is 520% in just 8-weeks of total trading which annualizes to 3,389%.
Bull markets have quirks, or personalities if you like.
The personality of this bull market is one that shows optimism before earnings -- irrespective of the actual earnings result. That has been a tradable phenomenon in Allison Transmission Holdings Inc.