Lam Research Corporation (NSDQ:LRCX) : Trading Earnings Optimism With Options
Date Published: 2018-11-7
DisclaimerThe 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.
PrefaceThere is a powerful pattern of optimism and momentum in Lam Research Corporation (NSDQ:LRCX) 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 1,139% annualized returns.
PREMISEThe 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. Now we can see it in Lam Research Corporation.
The Options Optimism Trade Before Earnings in Lam Research CorporationLet's look at the results of buying a monthly call option in Lam Research 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.
Now, unlike many of our other set-ups, this is in fact a straight down the middle bullish bet -- this absolutely takes on directional stock risk, so let's be conscious of that before we see the results, because they are mind bending.
Here are the results over the last three-years in Lam Research Corporation:
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 524.4% return, testing this over the last 12 earnings dates in Lam Research 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 1,139%. 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 524.4% return in less than six-full months of trading.
Setting ExpectationsWhile this strategy had an overall return of 524.4%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 35.38%.
Checking More Time Periods in Lam Research CorporationNow we can look at just the last year as well:
We're now looking at 179.8% returns, on 1 winning trades and 3 losing trades. It's worth noting again that we are only talking about two-weeks of trading for each earnings release, so this is 179.8% in just 8-weeks of total trading which annualizes to 1,172%.
➡ The average percent return over the last year per trade was 41.67%.
WHAT HAPPENEDThe 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 Lam Research 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.