news.cmlviz.com
menu
share

Avoid Bear Market Risk: The Secret to Option Trading Before Earnings in Applied Industrial Technologies Inc



Applied Industrial Technologies Inc (NYSE:AIT) : Avoid Bear Market Risk: The Secret to Option Trading Before Earnings

Date Published:

Preface
With the market's direction becoming tenuous, we can explore option trading opportunities in Applied Industrial Technologies Inc (NYSE:AIT) that do not rely on stock direction. It turns out, over the long-run, for stocks with certain tendencies like Applied Industrial Technologies Inc, there is a clever way to trade market anxiety or market optimism before earnings announcements with options.





The Trade Before Earnings
What a trader wants to do is to see the results of buying an at the money straddle a few days before earnings, and then sell that straddle just before earnings. Here is the setup:



We are testing opening the position 6 calendar days before earnings and then closing the position 1 day before earnings. This is not making any earnings bet. This is not making any stock direction bet.

Once we apply that simple rule to our back-test, we run it on an at-the-money straddle:

Returns
If we did this long at-the-money (also called '50-delta') straddle in Applied Industrial Technologies Inc (NYSE:AIT) over the last three-years but only held it before earnings we get these results:

AIT
Long At-the-Money Straddle

% Wins: 75.00%
Wins: 9 Losses: 3
% Return:  21.4% 
% Annualized:  130.2% 

We see a 21.4% return, testing this over the last 12 earnings dates in Applied Industrial Technologies Inc. That's a total of just 60 days (5 days for each earnings date, over 12 earnings dates). That's an annualized rate of 130.2%.

We can also see that this strategy hasn't been a winner all the time, rather it has won 9 times and lost 3 times, for a 75% win-rate and again, that 21.4% return in less than two-full months of trading.

We note that the CML Trade Machine Pro back-tester will soon have a scanner on top of the back-testing power which can search for any strategy, but in particular this one -- a non-earnings, non-stock direction, short-term bet with limited downside.

Here is a 1-minute and 25-second video that shows you exactly how to do this for any stock and what every professional option trader would rather that you don't see.

Learn more here: Try the Back-tester Yourself

Setting Expectations
While this strategy has an overall return of 21.4%, the trade details keep us in bounds with expectations:
      The average percent return per trade was 9.38%.


Option Trading in the Last Year
We can also look at the last year of earnings releases and examine the results:

AIT
Long At-the-Money Straddle

% Wins: 66.67%
Wins: 2 Losses: 1
% Return:  23.0% 
% Annualized:  559.0% 

In the latest year this pre-earnings option trade has 2 wins and lost 1 times and returned 23.0% which annualizes to 559.0% .
      Over just the last year, the average percent return per trade was 1.41%.



WHAT HAPPENED
This is it -- this is how people profit from the option market -- finding trading opportunities that avoid earnings risk and work equally well during a bull or bear market.