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Trading Momentum into Earnings Optimism With Options in Alleghany Corporation



Alleghany Corporation (NYSE:Y) : Trading Momentum into Earnings Optimism With Options

Date Published:

Disclaimer
The results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.

PREFACE
There is a powerful pattern of optimism and momentum in Alleghany Corporation (NYSE:Y) 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, and in fact, it hasn't even won more often than it has lost, but since this strategy has a celever risk control, the winning trades are so much larger than the losing trades, that it has returned 436% annualized returns.

PREMISE
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.

That is, totally irrespective of whether the stocks have a history of beating earnings, in the two-weeks before of earnings, several of them tend to rally abruptly into the event. There has been a way to profit from this pattern without taking any actual earnings risk -- and it is very powerful in Alleghany Corporation.



Option trading isn't about luck -- this four minute video will change your trading life forever: Option Trading and Truth


The Options Optimism Trade Before Earnings in Alleghany Corporation
Let's look at the results of buying a monthly call option in Alleghany Corporation 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.

Here are the results over the last three-years in Alleghany Corporation:

Y: Long Call

% Wins: 50%
Wins: 6 Losses: 6
% Return:  200.5% 
% Annualized:  436% 

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 200.5% return, testing this over the last 12 earnings dates in Alleghany Corporation. That's a total of just 168 days (14 days for each earnings date, over 12 earnings dates). That's an annualized rate of 436%. 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 6 times and lost 6 times, for a 50% win-rate and again, that 200.5% return in less than six-full months of trading. The trade will lose sometimes, but over the most recent trading history, this momentum and optimism options trade has won ahead of earnings.

Setting Expectations
While this strategy had an overall return of 200.5%, the trade details keep us in bounds with expectations:
      The average percent return per trade was 15.5%.


Checking More Time Periods in Alleghany Corporation
Now we can look at just the last year as well:

Y: Long Call

% Wins: 50%
Wins: 2 Losses: 2
% Return:  139.1% 
% Annualized:  907% 

Tap Here to See the Back-test

We're now looking at 139.1% returns, on 2 winning trades and 2 losing trades. It's worth noting again that we are only talking about two-weeks of trading for each earnings release, so this is 139.1% in just 8-weeks of total trading which annualizes to 907%.
      The average percent return over the last year per trade was 35.7%.

WHAT HAPPENED
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 Alleghany Corporation.

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.