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The One-Week Pre-earnings Momentum Trade With Options in BJ's Restaurants Inc



BJ's Restaurants Inc (NASDAQ:BJRI) : The One-Week Pre-earnings Momentum Trade With Options

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PREFACE
There is a bullish momentum pattern in BJ's Restaurants Inc (NASDAQ:BJRI) stock 7 calendar days before earnings, and we can capture that phenomenon explicitly 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 107.6%, but has also shown a win-rate of 75%.

LOGIC
The logic behind the test is easy to understand -- in a bull market there can be a stock rise ahead of earnings on optimism, or upward momentum, that sets in the one-week before an earnings date.

That is, totally irrespective of the reality that follows -- that is, independant of whether the stocks have a history of actually rising after earnings. There has been a way to profit from this pattern without taking any formal earnings risk in BJ's Restaurants Inc.



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The Bullish Option Trade Before Earnings in BJ's Restaurants Inc
We will examine the outcome of getting long a weekly call option in BJ's Restaurants Inc 7-days 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.



RISK MANAGEMENT
We can add another layer of risk management to the back-test by instituting and 40% stop loss and a 40% limit gain. Here is that setting:



In English, at the close of each trading day we check to see if the long option is either up or down 40% relative to the open price. If it was, the trade was closed.

RESULTS
Here are the results over the last two-years in BJ's Restaurants Inc:

BJRI: Long 40 Delta Call

% Wins: 75%
Wins: 6 Losses: 2
% Return:  107.6% 
% Annualized:  701% 

Tap Here to See the Back-test

The mechanics of the TradeMachine™ are that it uses end of day prices for every back-test entry and exit (every trigger).

We see a 107.6% return, testing this over the last 8 earnings dates in BJ's Restaurants Inc. That's a total of just 56 days (7-days for each earnings date, over 8 earnings dates). This has been the results of following the trend of bullish sentiment into earnings while avoiding the actual earnings result.

We can also see that this strategy hasn't been a winner all the time, rather it has won 6 times and lost 2 times, for a 75% win-rate and again, that 107.6% return in less than six-full months of trading.

Setting Expectations
While this strategy had an overall return of 107.6%, the trade details keep us in bounds with expectations:
      The average percent return per trade was 18.53%.


Back-testing More Time Periods in BJ's Restaurants Inc
Now we can look at just the last year as well:

BJRI: Long 40 Delta Call

% Wins: 75%
Wins: 3 Losses: 1
% Return:  114.4% 
% Annualized:  1,491% 

Tap Here to See the Back-test

We're now looking at 114.4% returns, on 3 winning trades and 1 losing trades. It's worth noting again that we are only talking about one-week of trading for each earnings release, so this is 114.4% in just 4-weeks of total trading which annualizes to 1,491%.
      The average percent return over the last year per trade was 26.88%.

WHAT HAPPENED
Bullish momentum and sentiment ahead of earnings can be a repeating pattern in a bull market for some companies. This is just one example of what has become a tradable phenomenon in BJ's Restaurants Inc.

Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.