Apple Inc (NASDAQ:AAPL) : The Volatility Option Trade After Earnings
Date Published: 2018-06-27
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.
This is a slightly advanced option trade that bets on volatility for a period that starts one-day after Apple Inc (NASDAQ:AAPL) earnings and lasts for the 6 calendar days to follow, that has been a winner for the last 2 years. We note the use of strict risk controls in this analysis.
Apple Inc (NASDAQ:AAPL) Earnings
In Apple 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:
* 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 14 days from expiration (but more than 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.
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.
Another risk reducing move we made was to use 14-day options and only hold them for 7-days so the trade doesn't suffer from total premium decay.
If we bought the at-the-money straddle in Apple Inc (NASDAQ:AAPL) over the last two-years but only held it after earnings we get these results:
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 111.1% return, testing this over the last 8 earnings dates in Apple Inc. That's a total of just 48 days (6 days for each earnings date, over 8 earnings dates). That's an annualized rate of 845%.
Looking at Averages
The overall return was 111.1%; but the trade statistics tell us more with average trade results:
➡ The average return per trade was 15.26% over 6-days.
➡ The average return per winning trade was 45.84% over 6-days.
➡ The average return per losing trade was -15.33% over 6-days.
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).
This is how people profit from the option market. Take a reasonable idea or hypothesis, test it, and apply lessons learned.
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.