Rapid7 Inc (NASDAQ:RPD) : Swing Trade Earnings Bullish Momentum With OptionsDate Published: 2018-02-13
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.
There is a pattern of bullish momentum in Rapid7 Inc (NASDAQ:RPD) stock just days before earnings, and we can track that by looking at swing returns in the option market. The strategy won't work forever, it can be easily derailed by a couple of down days in the market irrespective of Rapid7 Inc news, and in fact, it hasn't even won more often than it has lost, but since the profits from the winning trades are so much larger than the losing trades, that it has returned 1,047% annualized returns.
The idea is quite simple -- trying to take advantage of a pattern in short-term bullishness just before earnings, and then getting out of the way so no actual earnings risk is taken.
That is, totally independent of whether the stocks have a pattern of beating earnings, in the 3-days before earnings, there is a small group that have risen sharply ahead of the actual news. It's essentially bullish optimism in a very short-term window. There has been a way to use a short-term trade and generate profits from this tendency and it does not take earnings risk.
The Short-term Option Swing Trade Ahead of Earnings in Rapid7 Inc
We will examine the outcome of going long a weekly call option in Rapid7 Inc just three trading days before earnings and selling the call one day before the actual news.
This is construct of the trade, noting that the short-term trade closes before earnings and therefore does not take a position on the earnings result.
Often times we look at option set-ups that are longer-term, and take no directional bet -- this is not one of those times. This is a no holds barred short-term bullish swing trade with options and that's it. It's a bullish bet, so must be conscious of the delta risk.
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.
Below we present the back-test stats over the last two-years in Rapid7 Inc:
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 45.9% return, testing this over the last 8 earnings dates in Rapid7 Inc. That's a total of just 16 days (2-day holding period for each earnings date, over 8 earnings dates). That's an annualized rate of 1,047%. That's the power of following the short-term pattern of bullishness ahead earnings -- and not taking on the actual risk from the earnings outcome.
This short-term trade hasn't won every time, and it won't, but it has been a winner 4 times and lost 4 times, for a 50% win-rate and again, that 45.9% return in less than one-full month of actual holding period.
While this strategy has an overall return of 45.9%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 11.58%.
Looking at More Recent History
We did a multi-year back-test above, now we can look at just the last year:
We're now looking at 43.1% returns, on 3 winning trades and 1 losing trades.
➡ The average percent return over the last year per trade was 16.57%.
The pattern of this bull market reveals a bullish run up before earnings in the very short-term -- independent of the realized earnings result. This has been a tradable phenomenon in Rapid7 Inc. To see how to test this for any stock we welcome you to watch the demonstration video.
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.