Essex Property Trust Inc (NYSE:ESS) : Trading Earnings Optimism 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 powerful pattern of optimism and momentum in Essex Property Trust Inc (NYSE:ESS) 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 322% annualized returns, but has also shown a high win-rate of 63%.
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 Essex Property Trust Inc.
The Options Optimism Trade Before Earnings in Essex Property Trust IncLet's look at the results of buying a monthly call option in Essex Property Trust Inc 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 two-years in Essex Property Trust Inc:
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 98.8% return, testing this over the last 8 earnings dates in Essex Property Trust Inc. That's a total of just 112 days (14 days for each earnings date, over 8 earnings dates). That's an annualized rate of 322%. 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 5 times and lost 3 times, for a 63% win-rate and again, that 98.8% return in less than six-full months of trading.
Setting ExpectationsWhile this strategy had an overall return of 98.8%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 50.6%.
WHAT HAPPENEDBull markets have quirks, or personalities if you like.
The 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 Essex Property Trust Inc.
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.