The Trading Pattern in Apple During the Quiet Period Before Earnings

Discussion in 'Options' started by CML_Ophir, Oct 1, 2018.

  1. CML_Ophir


    The Trading Pattern in Apple During the Quiet Period Before Earnings


    Date Published: 2018-09-28


    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.

    Before optimism based momentum can run a stock higher in a short window before earnings, there is a full month before then where a large cap tech company that has delivered in the last few quarters is worth testing. Today, we see the phenomenon with Apple -- and it is very compelling.

    Apple next has earnings due out around 10-30-2018, but that date is not yet confirmed.

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


    The trade opens 30 calendar days before earnings and closes ten days before earnings. Note that this trade does not take on earnings risk -- it avoids it by closing well before the event.

    Building the Strategy Before We See the Results
    We constructed an AAPL multi-leg strategy, just as we did before and have done so many other times for the S&P 500 ETF (SPY), Nvidia, Micron, Netflix, Adobe, Alphabet, and Amazon back-tests.

    This one is slightly different than the prior ratio spreads -- it's a little more aggressive.

    Here is the image of the strategy we usually discuss in this realm of ratio spreads

    Version used on AMZN, NFLX, NVDA, MU, ADBE, SPY

    But today we make a slight change in our back-test:

    Version used on AAPL

    Note that the third leg has a higher delta, which provides the trade with more premium (a larger credit for selling that option than the 20 delta). That extra credit doesn't come for free -- this trade has slightly more downside risk if the stock dips hard.

    As usual, 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 37/25 delta monthly put spread.

    This is long one put spread

    The second leg is simply short two put spreads, as before:

    * Short two 30/10 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 three-years, or 12 pre-earnings periods.

    Tap here to See the Back-test

    And finally, for completeness, over the last four pre-earnings periods :

    Tap here to See the Back-test

    The Bear Market
    Since this back-test takes on a little more downside risk, let's see how it did during 2007-2009.

    Tap here to See the Back-test

    So we have some history to look back upon -- this back-test shows reasonable risk during the wildly volatile time that includes the Great Recession.

    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
    Win. Tap the link below to become your own option expert.
    Tap Here to Learn More

    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.