Trading the Retail Swoon Ahead of Pier 1 Earnings with Options
Pier 1 Imports Inc (NYSE:PIR) : Avoid Bear Market Risk: The Secret to Option Trading Before Earnings
Date Published: 2017-09-20
With the market's direction becoming tenuous and retail stocks looking to vulnerable to large swings, we can explore option trading opportunities in Pier 1 Imports Inc (NYSE:PIR) that do not rely on stock direction. It turns out, over the long-run, for stocks with certain tendencies like Pier 1 Imports Inc, there is a clever way to trade market anxiety or market optimism before earnings announcements with options.
This approach has returned 163% with a total holding period of just 72 days, with 11 wins and 1 loss over the last 3-years.
NOTE: According to Wall Street Horizon (our earnings date provider),PIR has earnings due out 9-27-2017 after the market closes.
The Trade Before Earnings
What a trader wants to do is to see the results of buying an at the money straddle a few days before earnings, and then sell that straddle just before earnings.
This trade is not a panacea, which is to say, we have to test it, stock by stock, to see when and why it worked. We start with Pier 1 Imports Inc.
We ran a scan for all tickers looking at the pre-earnings straddle, six-days before the earnings release.
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:
Tap Here to See the Tools at Work
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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