The Pattern After Earnings in Lam Research; After a Beat or a Miss

Discussion in 'Options' started by CML_Ophir, Oct 16, 2018.

  1. CML_Ophir


    The Pattern After Earnings in Lam Research; After a Beat or a Miss

    Date Published: 2018-10-16

    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.

    Lam Research (NASDAQ:LRCX) reports earnings on 10-16-2018 after the bell. There are two patterns for this stock following earnings -- one that has worked well on an earnings miss, the other that has worked well on an earnings beat. Today we look at both, in anticipation of either.

    Lam Research (NASDAQ:LRCX) Earnings: If it Beats
    If Lam Research beats earnings and the stock the day after -- that is one trigger.

    We are looking first if LRCX rises by 3% or more off of earnings and the 14 days to follow. Here is the set up:


    * Open the long out-of-the-money (40 delta) call one-calendar day after earnings.
    * Close the call 14 calendar days after earnings.
    * Use the options closest to 14 days from expiration.

    This is a straight down the directional test -- this back-test wins if the stock continues to rise after the initial 3% pop. Here is a chart to visualize the back-test:


    Since blindly owning calls can be a quick way to lose in the option market, we will apply a tight risk control to this analysis as well. We will add a 40% stop loss.


    If we bought the out-of-the-money (40 delta) call in Lam Research (NASDAQ:LRCX) over the last three-years but only after it had a 3% rise the day after earnings, we get these results:

    Long out-of-the-money (40 delta) call

    % Wins: 67%
    Wins: 2 Losses: 1
    % Return: 486%
    Tap Here to See the Back-test
    The mechanics of the TradeMachine® are that it uses end of day prices for every back-test entry and exit (every trigger).

    We see a 405% return, testing this over the last 12 earnings dates in Lam Research, which has only been triggered 3 times. earnings dates).

    Looking at Averages
    The overall return was 486%; but the trade statistics tell us more with average trade results:

    ➡ The average return per trade was 156% over 13-days.
    ➡ The average return per winning trade was 264% over 13-days.
    ➡ The average return per losing trade was -60% over 13-days.

    Lam Research (NASDAQ:LRCX) Earnings: If it Misses
    We can also look at a pattern that exists if Lam Research misses earnings.

    In this case we will examine a long out-of-the-money strangle (40 delta), if and only if the stock goes down by 3% or more the day after earnings. This back-test, like the prior one, waits a full day after earnings to see the stock move, and if a condition is hit, that would be the trigger.

    Here is that set-up:


    We can also put a 40% stop loss on this back-test:


    And finally the results over the last 3-years:
    LRCX: Long strangle

    % Wins: 100%
    Wins: 2 Losses: 0
    % Return: 200

    Tap Here to See the Back-test
    Now we see a 200% return over the last three-years if and only if the stock drops hard off of earnings.

    This is how people profit from the option market. Take a reasonable idea or hypothesis, test it, and apply lessons learned.
    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.