Packaging Corporation of America (NYSE:PKG) : Swing Trade Earnings Bullish Momentum With Options
Date Published: 2018-11-8
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 pattern of bullish momentum in Packaging Corporation of America (NYSE:PKG) stock just days before earnings, and we can track that by looking at swing returns in the option market. This is a short-term swing trade, it won't be a winner forever, and it can be easily derailed by a couple of down days in the market irrespective of Packaging Corporation of America news, but for now it has shown a repeating success that has not only returned 970% annualized returns, but has also shown a win-rate of 88%.
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. Now we can see it in Packaging Corporation of America.
The Short-term Option Swing Trade Ahead of Earnings in Packaging Corporation of America
We will examine the outcome of going long a weekly call option in Packaging Corporation of America 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.
RISK MANAGEMENTWe 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.
RESULTSBelow we present the back-test stats over the last two-years in Packaging Corporation of America:
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 42.5% return, testing this over the last 8 earnings dates in Packaging Corporation of America. 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 970%. 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 7 times and lost 1 times, for a 88% win-rate and again, that 42.5% return in less than one-full month of actual holding period.
Setting ExpectationsWhile this strategy has an overall return of 42.5%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 11.86%.
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 112.5% returns, on 4 winning trades and 0 losing trades.
➡ The average percent return over the last year per trade was 26.15%.
WHAT HAPPENEDBull markets tend to create optimism, whether it's deserved or not.
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 Packaging Corporation of America. 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.