Avoid Bear Market Risk: The Secret to Option Trading Before Earnings in Inc Inc (NASDAQ:AMZN) : Avoid Bear Market Risk: The Secret to Option Trading Before Earnings

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With the market's direction becoming tenuous, we can explore option trading opportunities in Inc (NASDAQ:AMZN) that do not rely on stock direction. It turns out, over the long-run, for stocks with certain tendencies like 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. The goal is to benefit from a unique and very short time frame when the stock might move 'a lot', either due to earnings anxiety (stock drops before earnings) or earnings optimism (stock rises before earnings), but taking no actual earnings risk. 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:

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

Long At-the-Money Straddle

% Wins: 83.33%
Wins: 10 Losses: 2
% Return:  185.1% 
% Annualized:  1,126.0% 

Tap Here to See the Back-test

We see a 185.1% return, testing this over the last 12 earnings dates in 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 1,126.0%.

We can also see that this strategy hasn't been a winner all the time, rather it has won 10 times and lost 2 times, for a 83% win-rate and again, that 185.1% 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 185.1%, the trade details keep us in bounds with expectations:
      The average percent return per trade was 3.69%.

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

Long At-the-Money Straddle

% Wins: 100.00%
Wins: 4 Losses: 0
% Return:  25.5% 
% Annualized:  464.5% 

In the latest year this pre-earnings option trade has 4 wins and lost 0 times and returned 25.5% which annualizes to 464.5% .
      Over just the last year, the average percent return per trade was 1.14%.

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.