For Micron Technology, Right After Earnings Has Shown a Sweet Spot Pattern

Discussion in 'Options' started by CML_Ophir, Sep 13, 2018.

  1. CML_Ophir

    CML_Ophir

    For Micron Technology, Right After Earnings Has Shown a Sweet Spot Pattern of Profitable Option Trading
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    Date Published: 2018-09-13

    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.

    LEDE
    It's September, historically the worst month for stocks, and Micron itself has been hammered by a memory glut and price drops. That does not mean that back-testing and option analysis stops -- in fact, it may be even better. Micron next has earnings due out on 2018-09-20, and five days after that would be 2018-09-25.

    Working off of several prior dossiers that look at the 'quiet period' for stocks following earnings, we have found a pattern of stock movement that has led to compelling back-tests. While we discussed Amazon, Facebook, Netflix, Nvidia, Adobe, the S&P 500, and the Russell 2000, today we look at another -- Micron Technology Corporation (NASDAQ:MU).

    Why Look at This?
    There will come a time when straight down the middle directional speculation will not work -- the bull market will turn, or at the very least, will pause.

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

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    The trade opens 5 days after earnings and closes 30 days later (using calendar days). Reprise: Micron next has earnings due out on 2018-09-20, and five days after that would be 2018-09-25.

    Building the Strategy Before We See the Results
    We constructed a multi-leg strategy, just as we did for the S&P 500 ETF (SPY) back-test, but that is not code for complicated -- it has just a few steps. Here is the entire image, and then we will break it down, leg by leg.

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    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.

    Rules
    The first leg is simply long one put spread:

    * Long one 37/20 delta monthly put spread.

    This is long one put spread
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    The second leg is simply short two put spreads:

    * Short two 30/10 delta monthly put spreads.

    This is short two put spreads
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    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:

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    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 five-years, or 20 post-earnings periods.

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    Tap here to See the Back-test


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

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    Tap here to See the Back-test


    What About a Bear Market?
    It's a fair question to ask how this trade did in the past during the bear market. And since it's a fair question, here is the answer.

    Fist we select our custom date period, in this case the bear market.

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    Then we look at the results:

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    Tap here to See the Back-test


    So, during the bear market this trade was a 50/50 win/loss rate with a positive return over 8 trades.

    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
    In a few mouse clicks and about 30 seconds, we identified a pattern that has repeatedly turned a profit over and over again -- a similar pattern that has repeated in Amazon, Netflix, Nvidia, Adobe, Facebook, the S&P 500 ETF (SPY), as well as the Russell 2000 ETF (IWM). 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.