Masimo Corporation (NSDQ:MASI) : 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 Masimo Corporation (NSDQ:MASI) 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, but for now it is a momentum play that has not only returned 693% annualized returns, but has also shown a high win-rate of 58%.
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.
That is, totally irrespective of whether the stocks have a history of beating earnings, in the two-weeks before of earnings, several of them tend to rally abruptly into the event. There has been a way to profit from this pattern without taking any actual earnings risk -- and it is very powerful in Masimo Corporation.
The Options Optimism Trade Before Earnings in Masimo CorporationLet's look at the results of buying a monthly call option in Masimo 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.
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 318.8% return, testing this over the last 12 earnings dates in Masimo 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 693%. 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 7 times and lost 5 times, for a 58% win-rate and again, that 318.8% return in less than six-full months of trading. The trade will lose sometimes, but over the most recent trading history, this momentum and optimism options trade has won ahead of earnings.
Setting ExpectationsWhile this strategy had an overall return of 318.8%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 40.5%.
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 Masimo 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.