When it's OK to Be Bullish: Swing Trade Earnings Bullish Momentum With Options in Intuit

Discussion in 'Options' started by CML_Ophir, Oct 31, 2018.

  1. CML_Ophir


    When it's OK to Be Bullish: Swing Trade Earnings Bullish Momentum With Options in Intuit Inc

    Date Published: 2018-10-27

    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.

    A down market can still make room for a bullish momentum pattern. Today we look at one such pattern in a Nasdaq 100 component.

    The Short-term Option Swing Trade Ahead of Earnings in Intuit Inc
    We will examine the outcome of going long a weekly out of the money (40 delta) call option in Intuit Inc just three trading days before earnings and selling the call one day before the actual news, but only if the prior earnings move, from the quarter before was up.

    Here is an image of the phenomenon we're back-testing:


    This is construct of the trade, noting that the short-term trade closes before earnings and therefore does not take a position on the earnings result.


    Often times we look at option set-ups that are longer-term, and take no directional bet -- this is not one of those times. This is a no holds barred short-term bullish swing trade with options and that's it. It's a bullish bet, so must be conscious of the delta risk.

    Here is a chart of the relevant prior earnings release for Intuit:


    We can see that the prior report created a stock pop of more than 1%, so this next earnings release from Intuit in November, does have a trigger.

    We can add another layer of risk management to the back-test by instituting and 40% stop loss and a 40% limit gain. Here is that setting:


    In English, at the close of each trading day we check to see if the long option is either up or down 40% relative to the open price. If it was, the trade was closed.

    Below we present the back-test stats over the last five-years in Intuit Inc, using the conditional entry of a prior earnings beat.:

    INTU: Long 40 Delta Call

    % Wins: 88.9%
    Wins: 8 Losses: 1
    % Return: 340%

    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).

    This short-term trade hasn't won every time, and it won't, but it has been a winner 8 times and lost 1 time when the condition has been met.

    Setting Expectations
    While this strategy has an overall return of 340%, the trade details keep us in bounds with expectations:

    ➡ The average percent return per trade was 38.1%.
    ➡ The average percent return per winning trade was 48%.
    ➡ The percent return per losing trade was -41.7%.

    Looking at More Recent History
    We did a multi-year back-test above, now we can look at just the two-years:

    INTU: Long 40 Delta Call

    % Wins: 100%
    Wins: 4 Losses: 0
    % Return: 200%

    Tap Here to See the Back-test
    ➡ The average percent return over the last two-years per trade was 52%.

    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.