LEDE
This is a slightly advanced option trade that bets on volatility for a period that starts one-day after Alphabet Inc (NASDAQ:GOOGL) earnings and lasts for the 6 calendar days to follow, that has been a winner for the last 3 years. We note the use of strict risk controls in this analysis.

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Alphabet Inc (NASDAQ:GOOGL) Earnings
In Alphabet Inc, irrespective of whether the earnings move was large or small, if we waited one-day after earnings and then bought a one-week straddle (using weekly options), the results were quite strong. This trade opens one-day after earnings were announced to try to find a stock that moves a lot after the earnings announcement.

Simply owning options after earnings, blindly, is likely not a good trade, but hand-picking the times and the stocks to do it in can be useful. We can test this approach without bias with a custom option back-test. Here is the timing set-up around earnings:



Rules
* Open the long at-the-money straddle one-calendar day after earnings.
* Close the straddle 7 calendar days after earnings.
* Use the options closest to 7 days from expiration (but at least 7-days).

This is a straight down the middle volatility bet -- this trade wins if the stock is volatile the week following earnings and it will stand to lose if the stock is not volatile. This is not a silver bullet -- it's a trade that needs to be carefully examined.

But, this is a stock direction neutral strategy, which is to say, it wins if the stock moves up or down -- it just has to move.

RISK CONTROL
Since blindly owning volatility can be a quick way to lose in the option market, we will apply a tight risk control to this analysis as well. We will add a 40% stop loss and a 40% limit gain.



In English, at the close of every trading day, if the straddle is up 40% from the price at the start of the trade, it gets sold for a profit. If it is down 40%, it gets sold for a loss. This also has the benefit of taking profits if there is volatility early in the week rather than waiting to close 7-days later.

RESULTS
If we bought the at-the-money straddle in Alphabet Inc (NASDAQ:GOOGL) over the last three-years but only held it after earnings we get these results:

GOOGL
Long At-the-Money Straddle

% Wins: 75%
Wins: 9 Losses: 3
% Return:  555.1% 

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 555.1% return, testing this over the last 12 earnings dates in Alphabet Inc. That's a total of just 72 days (6 days for each earnings date, over 12 earnings dates).



Looking at Averages
The overall return was 555.1%; but the trade statistics tell us more with average trade results:
      The average return per trade was 46.25% over 6-days.
      The average return per winning trade was 75.71% over 6-days.
      The average return per losing trade was -42.14% over 6-days.

An Alternative
For the the more advanced option trader, a similar approach to this strategy would be to sell a strangle around this straddle turning it into an iron butterfly. You can test this approach in the CML Trade Machine™ (option back-tester).

WHAT HAPPENED
This is how people profit from the option market. Take a reasonable idea or hypothesis, test it, and apply lessons learned.