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The Repeating Pattern in Alphabet Inc That Triggers Right After an Earnings Beat and The Option Trade That Follows

The Repeating Pattern in Alphabet Inc That Triggers Right After an Earnings Beat and The Option Trade That Follows



Alphabet Inc (NASDAQ:GOOGL) : The Repeating Pattern in Alphabet Inc That Triggers Right After an Earnings Beat and The Option Trade That Follows


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.


LEDE

Alphabet Inc (NASDAQ:GOOGL) has earnings due out 7-23-2018 after the market closes and there has been a bullish momentum pattern 1 trading day after earnings, if and only if the stock showed a large gap up after the actual earnings announcement. The back-test shows zero losses in the last three-years. In the case of no large upward earnings move this quarter, there is no trigger for the current quarter, but this back-test still holds, we just put in a pin in it and wait to see it trigger later.

Here is a look at two of the more recent events and how it looks on a stock chart:



This is a conditional entry -- the company reports earnings and if the stock move off of that report is a 3% gain or larger, then a bullish position is back-tested looking for continuing momentum in a short window to follow. The event is rare, but when it has occurred, the back-test results are noteworthy.

Alphabet Inc (NASDAQ:GOOGL) Earnings

This back-test opens one-day after earnings were announced to try to find a stock that continues an upward trajectory after an earnings rally. We can test this approach without bias with a custom option back-test.

Here is the timing set-up around earnings:



Rules

* Condition: Wait for the one-day stock move off of earnings, and if it shows a 3% gain or more in the underlying, then, follow these rules:
* Open the long at-the-money call one-trading day after earnings.
* Close the long call 14 calendar days after earnings.
* Use the options closest to 21 days from expiration (but more than 14 days).

This is a straight down the middle direction trade -- this trade wins if the stock is continues on an upward trajectory after a large earnings move the two-weeks following earnings and it will stand to lose if the stock does not rise. This is not a silver bullet -- it's a trade that needs to be carefully examined.

But, this is a conditional back-test, which is to say, it only triggers if an event before it occurs.

RISK CONTROL

Since blindly owning calls 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 call 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 a stock rally early in the two-week period rather than waiting to close 14-days later.

Another risk reducing move we made was to use 21-day options and only hold them for 14-days so the trade doesn't suffer from total premium decay.

RESULTS

If we bought the at-the-money call in Alphabet Inc (NASDAQ:GOOGL) over the last three-years but only held it after earnings and after an earnings pop higher, we get these results:

GOOGL
Long 50 Delta Call

% Wins: 100%
Wins: 4 Losses: 0
% Return:  177.6% 

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). This is only triggered of the move off of the earnings the next day closes at a 3% gain or larger.



Track this trade idea. Get alerted for ticker `GOOGL`  1 days after earnings

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Looking at Averages

The overall return was 177.6%; but the trade statistics tell us more with average trade results:

      The average return per trade was 46.31% over each 13-day period.

WHAT IF THERE IS NO POSITIVE EARNINGS MOVE?

This back-test still holds, but in the case of no large upward earnings move, there is no trigger for the current quarter.

WHAT HAPPENED

To find exactly the companies where this strategy has worked, and other repeating patterns, tap the link below for a full video description.
Tap Here to See the Tools at Work

Risk Disclosure
You should read the Characteristics and Risks of Standardized Options.

Past performance is not an indication of future results.

Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.

Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.

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.