AMAT - How to Trade it If There's an Earnings Beat

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  1. CML_Ophir

    CML_Ophir Sponsor

    The Pattern in Applied Materials Inc That Triggers Right After an Earnings Beat

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    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
    Applied Materials Inc (NASDAQ:AMAT), much like Lam Research (NASDAQ:LRCX), is a tech bellwether. While it doesn't get the headlines that the FAANG stocks do, it is the precursor -- the indicator, of technology industry health.

    Lam Research recently beat earnings and called a hard bottom to a lull in memory demand for September and that sent the stock flying after earnings, even as the broader market sold-off.

    Today we note a powerful bullish momentum pattern in Applied Materials stock 1 trading day after earnings, if and only if the stock showed a large gap up after the actual earnings announcement.

    This is a conditional entry -- the company reports earnings and if the stock move off of that report is a 3% gain or larger, then a bullish position is back-tested looking for continuing momentum in a short window to follow. The event is rare, but when it has occurred, the back-test results are noteworthy.

    We can also look at a three-year stock chart for AMAT, and note that this name, unlike some of the other high fliers that have beat earnings, AMAT is not at an all-time high, and does have room to reach that critical potential price resistance. [​IMG]


    Applied Materials Inc (NASDAQ:AMAT) Earnings
    In Applied Materials Inc, if the stock move immediately following an earnings result was large (3% or more to the upside), if we test waiting one-day after that earnings announcement and then bought a three-week at the money (50 delta) call, the results were quite strong.

    This back-test opens one-day after earnings were announced to try to find a stock that continues an upward trajectory after an earnings rally.

    We can test this approach without bias with a custom option back-test. Here is the timing set-up around earnings:

    [​IMG]


    Rules
    * Condition: Wait for the one-day stock move off of earnings, and if it shows a 3% gain or more in the underlying, then, follow these rules:
    * Open the long at-the-money call one-trading day after earnings.
    * Close the long call 14 calendar days after earnings.
    * Use the options closest to 21 days from expiration (but more than 14 days).

    This is a straight down the middle direction trade -- this trade wins if the stock is continues on an upward trajectory after a large earnings move the two-weeks following earnings and it will stand to lose if the stock does not rise. This is not a silver bullet -- it's a trade that needs to be carefully examined.

    But, this is a conditional back-test, which is to say, it only Triggers if an event before it occurs.

    RISK CONTROL
    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 and a 40% limit gain.

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    In English, at the close of every trading day, if the call is up 40% from the price at the start of the trade, it gets sold for a profit. If it is down 40%, it gets sold for a loss. This also has the benefit of taking profits if there is a stock rally early in the two-week period rather than waiting to close 14-days later.

    Another risk reducing move we made was to use 21-day options and only hold them for 14-days so the trade doesn't suffer from total premium decay.

    RESULTS
    If we bought the at-the-money call in Applied Materials Inc (NASDAQ:AMAT) over the last three-years but only held it after earnings and after an earnings pop higher, we get these results:

    AMAT
    Long 50 Delta Call

    % Wins: 100%
    Wins: 5 Losses: 0
    % Return: 385%

    Tap Here to See the Back-test
    The mechanics of the Trade Machine® are that it uses end of day prices for every back-test entry and exit (every trigger).

    Looking at Averages
    The overall return was 385%; but the trade statistics tell us more with average trade results:

    ➡ The average return per trade was 55.1% over each 13-day period.

    HOW DID WE FIND THIS PATTERN?
    We simply used the Trade Machine® Pro scanner. We examined the NASDAQ 100 as our ticker group, and then looked at the "1 Day After Earnings Jump, Long Call" strategy.

    [​IMG]


    One click of the button gave us the results that were presented above.

    MOVING FORWARD
    There's a lot less luck to successful option trading than many people realize. Take a reasonable idea, 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.