Trading Earnings Optimism With Options In Arch Capital Group Ltd

Trading Earnings Optimism With Options in Arch Capital Group Ltd.

Arch Capital Group Ltd. (NASDAQ:ACGL) : Trading Earnings Optimism With Options

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There is a powerful pattern of optimism and momentum in Arch Capital Group Ltd. (NASDAQ:ACGL) 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 356% annualized returns, but has also shown a high win-rate of 63%.

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. Now we can see it in Arch Capital Group Ltd..

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The Options Optimism Trade Before Earnings in Arch Capital Group Ltd.
Let's look at the results of buying a monthly call option in Arch Capital Group Ltd. two-weeks before earnings (using calendar days) 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 two-years in Arch Capital Group Ltd.:

ACGL: Long Call

% Wins: 63%
Wins: 5 Losses: 3
% Return:  109.1% 
% Annualized:  356% 

We see a 109.1% return, testing this over the last 8 earnings dates in Arch Capital Group Ltd.. That's a total of just 112 days (14 days for each earnings date, over 8 earnings dates). That's an annualized rate of 356%. 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 5 times and lost 3 times, for a 63% win-rate and again, that 109.1% return in less than six-full months of trading.

Setting Expectations
While this strategy had an overall return of 109.1%, the trade details keep us in bounds with expectations:
      The average percent return per trade was 58.53%.

Checking More Time Periods in Arch Capital Group Ltd.
Now we can look at just the last year as well:

ACGL: Long Call

% Wins: 63%
Wins: 3 Losses: 1
% Return:  83.6% 
% Annualized:  545% 

We're now looking at 83.6% 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 83.6% in just 8-weeks of total trading which annualizes to 545%.
      The average percent return over the last year per trade was 119.57%.

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 Arch Capital Group Ltd..