KAR Auction Services, Inc (NYSE:KAR) : Swing Trading Earnings Bullish Momentum With OptionsDate Published: 2017-08-12
There is a pattern of bullish momentum in KAR Auction Services, Inc (NYSE:KAR) stock just days before earnings, and we can track that by looking at swing returns in the option market. The strategy won't work forever, it can be easily derailed by a couple of down days in the market irrespective of KAR Auction Services, Inc news, and in fact, it hasn't even won more often than it has lost, but since the profits from the winning trades are so much larger than the losing trades, that it has returned 1,508% annualized returns.
The idea is quite simple -- trying to take advantage of a pattern in short-term bullishness just before earnings, and then getting out of the way so no actual earnings risk is taken.
That is, totally independent of whether the stocks have a pattern of beating earnings, in the 3-days before earnings, there is a small group that have risen sharply ahead of the actual news. It's essentially bullish optimism in a very short-term window. There has been a way to use a short-term trade and generate profits from this tendency and it does not take earnings risk.
The Short-term Option Swing Trade Ahead of Earnings in KAR Auction Services, Inc
We will examine the outcome of going long a monthly call option in KAR Auction Services, Inc just three calendar days before earnings and selling the call one day before the actual news.
This is construct of the trade, noting that the short-term trade closes before earnings and therefore does not take a position on the earnings result.
Often times we look at option set-ups that are longer-term, and take no directional bet -- this is not one of those times. This is a no hold barred short-term bullish swing trade with options and that's it. It's a bullish bet, so must be conscious of the delta risk.
Below we present the back-test stats over the last two-years in KAR Auction Services, Inc:
We see a 66.1% return, testing this over the last 8 earnings dates in KAR Auction Services, Inc. That's a total of just 16 days (2-day holding period for each earnings date, over 8 earnings dates). That's an annualized rate of 1,508%. That's the power of following the short-term pattern of bullishness ahead earnings -- and not taking on the actual risk from the earnings outcome.
This short-term trade hasn't won every time, and it won't, but it has been a winner 4 times and lost 4 times, for a 50% win-rate and again, that 66.1% return in less than one-full month of actual holding period.
While this strategy has an overall return of 66.1%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 8.76%.
Looking at More Recent History
We did a multi-year back-test above, now we can look at just the last year:
We're now looking at 29.3% returns, on 2 winning trades and 2 losing trades.
➡ The average percent return over the last year per trade was 6.7%.
The pattern of this bull market reveals a bullish run up before earnings in the very short-term -- independent of the realized earnings result. This has been a tradable phenomenon in KAR Auction Services, Inc. To see how to test this for any stock we welcome you to watch the demonstration video.