A Volatility Pattern You'll Want to See Before Earnings in Children's Place (PLCE)

Discussion in 'Options' started by CML_Ophir, Aug 8, 2018.

  1. CML_Ophir

    CML_Ophir Sponsor

    A Volatility Pattern You'll Want to See Before Earnings in Children's Place (PLCE)

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    Date Published: 2018-08-08

    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
    Pre-earnings straddles and strangles hold a special place in the back-testing of option trades in that these strategies tend to show quite contained loss profiles due to the nature of the position, and for the right stocks, rather large gain profiles. We see this exact phenomenon in Children's Place Inc (The) (PLCE), and it's well worth a look.

    The Trade Before Earnings
    What a trader wants to do is to see the results of buying an at out of the money strangle (40 delta) a few days before earnings, and then sell that strangle just 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.

    The analysis also tends to benefit from the unique period where time decay slows due to earnings and that combined with a non-directional position can create a nice risk profile.

    Here is the setup:

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    We are testing opening the position 5 trading days before earnings and then closing the position 1 day before earnings. This is 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 out-of-the-money strangle:

    Returns
    If we did this long out-of-the-money strangle, using two-week options, in Children's Place Inc (PLCE) over the last two-years but only held it before earnings we get these results:

    PLCE
    Long At-the-Money Straddle


    % Wins: 87.5%
    Wins: 7 Losses: 1
    % Return: 799%

    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 799% return, testing this over the last 8 earnings dates in Children's Place Inc.

    We can also see that this strategy hasn't been a winner all the time, rather it has won 7 times and lost once.

    Setting Expectations
    While this strategy has an overall return of 206.9%, the trade details keep us in bounds with expectations:

    ➡ The average percent return per trade was 69.2%.
    ➡ The average percent return per winning trade was 79.6%.
    ➡ The percent return for thee losing trade was -3.9%.

    MOVING FORWARD
    In a few mouse clicks and about 30 seconds, you can identify a pattern that has repeatedly turned a profit over and over again, then see 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.
     
    tb123 likes this.
  2. SmallFry

    SmallFry

  3. This is the beauty of marketing. During this week we have a ton of earnings releases. So what this guy did was do this test on 50 different companies. Once he found a company that this worked on he posted it on ET. Out of 50 companies there is bound to be one that has a win ratio of 6:1. He finds it and posts it here :). This is just another person trying to fool the crowd in buying the IV ramp (using his software to find good trades).
     
    traider, SmallFry and oldmonk like this.
  4. Pilot550

    Pilot550

    I don't think this is quite as simple as "just another person trying to fool the crowd".

    I think you can fairly question the statistical significance of results that use such a small sample as the 8-12 past earnings dates as a basis for deciding whether a trade has merit, but then it's also true that a good deal of the mis-pricing of single name options occurs in the period preceding and following earnings reports, so it's also logical that this is where you might want to be looking despite the limited number of events available. PEAD, for example, was (and still is to some degree) a clearly identifiable effect associated with certain earnings report results which would show up in such backtests. In short, there are reasons why one might find such software useful for trade selection as opposed to it just being a mirror of a broad earnings vol effect with no added value.

    As for the marketer, while there are certainly lots of the questionable variety out there I doubt that Mr. Gottlieb falls into that category. A brief review of his CV and my experience of his past work at Livevol, where I held an account until CBOE bought the company, suggests that he's more than knowledgeable enough about options market dynamics to be able to deliver an analytical tool that has potential.
     
    CML_Ophir likes this.
  5. CML_Ophir

    CML_Ophir Sponsor

    As a member you are privy to the statistical results of this strategy both during the bull market and the great recession.

    There is an anomaly here, that has persisted across the NASDAQ 100 and Dow 30 as our study group over a 10 year period, a bull and bear market.

    Your presumption of ignorance, or even worse, of impropriety, is more of a comment on you than any research I have done, whether it was published in academic journals, or simply to our members.
     
  6. These two points alone cast a big shadow on the results because wider b/a spreads can change where you get filled to get in and out....
     
  7. CML_Ophir

    CML_Ophir Sponsor

    You can set execution to any type you like -- you don't have to use mid-market, or market, you can go in between there as well.
     
  8. destriero

    destriero


    He's referring to microstructure.
     
  9. Dude PLCE has not even confirmed earnings..... if your going to show a study at least do it on something that is confirmed... Actually the trade you have mentioned will most likely be a losing trade as the trade will be the following week. That is the reason why it's under priced.... geez and to think you were a market maker......
     
  10. Actually i am going to take this one step further. If you are going to advertise your software that's fine. BUT at least post something beneficial!! Backtesting is AWESOME if it actually helps the cause.....