CMLViz Blog: Swing Trading Earnings Bullish Momentum With Options in Micron Technology Inc
Tue September 19, 2017
Micron Technology Inc (NASDAQ:MU): Swing Trading Earnings Bullish Momentum With Options
Date Published: 2017-09-13, Capital Market Laboratories
There is a pattern of bullish momentum in Micron Technology Inc (NASDAQ:MU) stock just four-days before earnings.
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 Micron Technology Inc news, but for now it has shown a repeating success that has not only returned 204% over the last two-years, but has also shown a win-rate of 100% over those two-years, or in English, it has won 8 times and lost 0 times.
We do note that three years ago, this back-test showed 2 wins and 2 losses.
NOTE: Per our earnings data provider, Wall Street Horizon, Micron has earnings due out on September 26th after the market closes.
The idea is to try 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.
That is, totally independent of whether the stocks have a pattern of beating earnings, in the 4 calendar days before earnings, there is a small group that have risen sharply ahead of the actual news. It's essentially bullish optimism in a very short-term window.
The Short-term Option Swing Trade Ahead of Earnings in Micron Technology Inc
We will examine the outcome of going long a weekly call option in Micron Technology Inc just four calendar 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.
We 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.
We found this trade using the TradeMachine Pro scanner -- searching for 3-day pre-earnings long calls over the NASDAQ 100, and sorted by earnings date:
Here are those results:
We then went ahead and did our own refinement, and found the at 4-days pre-earnings showed better results in the back-test.
Below we present the back-test stats over the last two-years in Micron Technology Inc:
|MU: Long 40 Delta Call|
|Wins: 8||Losses: 0|
We see a 204% return, testing this over the last 8 earnings dates in Micron Technology Inc. That's a total of just 24 days (3-day holding period for each earnings date, over 8 earnings dates).
While this strategy has an overall return of 204%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 30.1% in just a three-day holding period.
OVER THE LAST YEAR
We note the deflating part of this back-test is that over the last year the trade has shown just a 7.9% average return, which is substantially lower than the results over two-years.
Bull markets tend to create optimism, whether it's deserved or not. With the recent history of earnings beats, this gets twice the attention and is worth noting well ahead of the next event. To see how to test this for any stock we welcome you to watch this quick demonstration video:
Tap Here to See the Tools at Work
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.