Adobe (NASDAQ:ADBE) Has Had a Remarkable Pattern, and the Entry is Upon Us Again

Discussion in 'Options' started by CML_Ophir, Sep 9, 2018.

  1. CML_Ophir


    Adobe (NASDAQ:ADBE) Has Had a Remarkable Pattern, and the Entry is Upon Us Again


    Date Published: 2018-09-08

    The 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.

    While the pre-earnings momentum pattern in Adobe was quite impressive, it turns out that the post-earnings pattern far exceeds even that high water mark. It has shown 19 winning back-tests and one losing over the last 5-years and a return that exceeded 300%.

    Why Look at This?
    There will come a time when straight down the middle directional speculation will not work -- the bull market will turn, or at the very least, will pause. That does not mean that back-testing and option analysis stops -- in fact, it may be even better.

    There is a lesson here for everyone -- just betting that the stock market will rise, even through a decade of a bull market, isn't the only way to find profitable back-tests.

    Custom Timing
    First we'll start with timing. Here it is:


    The trade opens 5 days after earnings and closes 30 days later. ADBE has earnings due out on 2018-09-13, and five calendar days after that would be 9-18-2018 near the market close.

    Building the Strategy Before We See the Results
    We constructed a multi-leg strategy, just as we did for the S&P 500 ETF (SPY), Amazon, Nvidia, and Netflix back-tests, but that is not code for complicated -- it has just a few steps. Here is the entire image, and then we will break it down, leg by leg.


    Rather than take this is one big trade, we can actually break it into two familiar trades. This could be one way to apply this lesson in real life. That is, open 2 put spreads.

    The first leg is simply long one put spread:

    * Long one 40/22 delta monthly put spread.

    This is long one put spread

    The second leg is simply short two put spreads:

    * Short two 30/15 delta monthly put spreads.

    This is short two put spreads

    What Does This Mean?
    This is casually called a ratio put spread, and specifically this is a 1 x 2 x 1 x 2 (read out loud as "1 by 2 by 1 by 2") put spread.

    The idea is to create an option position that:

    * Creates a credit at onset.
    * Has no upside risk (a stock rise to any price should be profitable).
    * Has some downside bias (if the stock goes down "a little" it profits at the maximum level)
    * Has a hard limit on total downside.

    Broadly speaking, this is how all of that looks in a profit and loss chart at expiration:


    This strategy is profitable in the green shaded area, and shows a loss in the red shaded area.

    To get your bearings:

    * The maximum loss starts at the lowest strike price. Any stock price there or lower shows a capped loss at its maximum.
    * The maximum gain occurred right at the second-strike price (the first short strike price), which is below the initial stock price at onset of the trade.

    This strategy does well in a bull market but does best in a slightly bearish market. It does worst when there is a large stock drop, but that loss is capped.

    Finally, The Results
    Here are the results of this strategy over the last five-years, or 20 post-earnings periods.

    Tap here to See the Back-test

    Interestingly, if we back-test this exact strategy but only open the trade if the earnings result 5-days prior showed a stock move up the next day (of any amount), this is how the back-test looks across the same five-years:

    First the added rule:


    And now the results over five years:

    Tap here to See the Back-test

    And finally, for completeness, over the last four post-earnings periods, without the extra rule:

    Tap here to See the Back-test

    What About a Bear Market?
    It's a fair question to ask how this trade did in the past during a volatile market, the bear market, and the recovery. And since it's a fair question, here is the answer.

    Fist we select our custom date period, in this case the bear market.


    Then we look at the results:

    Tap here to See the Back-test

    So, during the bear market this back-test won more often than it lost, but was a net loser over those three-years.

    How to Try This Yourself
    We simply used the Trade MachineĀ® Custom Strategy builder. You can create it yourself immediately as a Trade Machine member, by simply clicking on any of the back-test links above, then click the "edit" button, and save.

    What Happened
    In a few mouse clicks and about 30 seconds, we empirically identify a pattern that has repeatedly turned a profit over and over again, then displayed those results with no room for confusion or doubt. You can tap the link below to become your own option expert.
    Tap Here, See for Yourself

    Risk Disclosure
    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.

    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.
  2. niko79542


    Let me get this straight. We have not seen the market movements for (at the time of your posting) 9.10 - 9.18, and you would like to predict an entry for 9.18? What exactly are we supposed to take away from this post
  3. CML_Ophir


    i think the main takeaway is that this is a bit too sophisticated for you and perhaps not a valuable read in that case, which is perfectly reasonable.
    niko79542 likes this.