Trading the Retail Swoon Ahead of Pier 1 Earnings with Options
While the scanner looks to open a back-test 6 days before earnings and close it one day before earnings, we do note that PIR reports earnings after the close on 9-27-2017 according to our data provider Wall Street Horizon. So, we adjusted the back-test a little to optimize it, like this:
We are testing opening the position 6 calendar days before earnings and then closing the position the day of earnings. This is not making any earnings bet -- it is closed before earnings are announced. This is not making any stock direction bet.
Once we apply that simple rule to our back-test, we run it on an at-the-money straddle:
If we did this long at-the-money (also called '50-delta') straddle in Pier 1 Imports Inc (NYSE:PIR) over the last three-years but only held it before earnings we get these results:
Long At-the-Money Straddle
|Wins: 11||Losses: 1|
We see a 163% return, testing this over the last 12 earnings dates in Pier 1 Imports Inc. That's a total of just 72 days (6 days for each earnings date, over 12 earnings dates). We can also see that this strategy hasn't been a winner all the time, rather it has won 11 times and lost 1 time, for a 91% win-rate
While this strategy has an overall return of 163%, the trade details keep us in bounds with expectations:
The average percent return per trade was 14.4%.
The average percent return per winning trade was 16%.
The percent return for the losing trade was -3.3%.
With retail stocks still in shell shock from all things Amazon, and the poor showing from Bead, Bath and Beyond (BBBY), there is at least a reasonable hypothesis to support a narrative that PIR stock could in fact be volatile over the next week ahead of earnings.
This is it -- this is how people profit from the option market -- finding trading opportunities that avoid earnings risk and work equally well during a bull or bear market.
To see how to do this for any stock we welcome you to watch this quick demonstration video:
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Thanks for reading.
You should read the Characteristics and Risks of Standardized Options.
Past performance is not an indication of future results.
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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.