Disclaimer
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.
Preface
With the market’s direction becoming tenuous, especially in mega tech and especially yet further in semi-conductors, we can explore option trading opportunities in Micron Technology, Inc (NASDAQ:MU) that do not rely on stock direction.
It turns out, over the long-run, for stocks with certain tendencies like Micron Technology, Inc, there is a clever way to trade market anxiety or market optimism before earnings announcements with options.
For context, here is a two-year stock chart of MU, and we have noted the recent volatility.
The Trade Before Earnings
The goal is to benefit from a unique and very short time frame when the stock might move ‘a lot’, either due to earnings anxiety (stock drops before earnings) or earnings optimism (stock rises before earnings), but taking no actual earnings risk.
This trade is not a panacea, which is to say, we have to test it, stock by stock, to see when and why it worked. We start with Micron Technology, Inc.
Here is the setup:
We are testing opening the position 3 trading days before earnings and then closing the position on the day of earnings. Since MU reports after the market closes, this back-test does not making any earnings bet. This is not making any stock direction bet.
Once we apply that simple rule to our back-test, we run it on an at-the-money straddle:
RISK MANAGEMENT
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 straddle is either up or down 40% relative to the open price. If it was, the trade was closed.
Returns
If we did this long at-the-money (also called ’50-delta’) straddle, using the options closest to 30-days from expiration, in Micron Technology, Inc (NASDAQ:MU) over the years but only held it before earnings we get these results:
| MU Long At-the-Money Straddle | ||
| % Wins: | 75% | |
| Wins: 3 | Losses: 1 | |
| % Return: | 42.9% |
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 42.9% return, testing this over the last 4 earnings dates in Micron Technology, Inc. That’s a total of just 16 days (4 days for each earnings date, over 4 earnings dates).
We can also see that this strategy hasn’t been a winner all the time, rather it has won 3 times and lost 1 time, for a 75% win-rate.
Setting Expectations
While this at-the-money pre-earnings straddle strategy has an overall return of 42.9%, the trade details keep us in bounds with expectations:
The average percent return per trade was 10.8% over four-days.
The average percent return per winning trade was 16.1% over four-days.
The percent return for the losing trade was -5.3% over four-days.
We note the rather risk controlled nature of this setup over the last year.
WHAT HAPPENED
This is it — this is how people profit from the option market — finding trading opportunities that avoid earnings risk and work equally well during a bull or bear market.
To see how to do this for any stock we welcome you to watch this quick demonstration video:
Tap Here to See the Tools at Work
Thanks for reading.
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.