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Trading Pre-earnings Momentum in Microsoft

Mon October 2, 2017

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Microsoft Corporation (NASDAQ:MSFT) : The One-Week Pre-earnings Momentum Trade With Options

Date Published: 2017-09-29

LEDE 
Microsoft Corporation (NASDAQ:MSFT) has earnings due out on October 26th, 2017, after the market closes, according to our data provider Wall Street Horizon. 7-days before then would be October 19th, 2017. Microsoft is the forgotten mega tech -- the third largest company in the world behind Apple and Alphabet, but it doesn't fall into any fun Acronyms, like FANG, or even FAANG. 

But, this pre-earnings momentum back-test is unlike any other in that it is the only one, out of more than 4,000 scans, that has never lost over the last three-years. Here we go. 

PREFACE 
There is a bullish momentum pattern in Microsoft Corporation (NASDAQ:MSFT) stock 7 calendar days before earnings, and we can capture that phenomenon explicitly 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 851.3%, but has also shown a win-rate of 100% over the last three-years. 

LOGIC 
The logic behind the test is easy to understand -- in a bull market there can be a stock rise ahead of earnings on optimism, or upward momentum, that sets in the one-week before an earnings date. Now we can see it in Microsoft Corporation. 

The Bullish Option Trade Before Earnings in Microsoft Corporation 
We will examine the outcome of getting long a weekly call option in Microsoft Corporation 7-days before earnings (using calendar days) and selling the call before the earnings announcement.