Intel: Volatility, Yeah We Can Trade That Just Fine

Discussion in 'Options' started by CML_Ophir, Oct 9, 2018.

  1. CML_Ophir

    CML_Ophir

    Intel: Volatility, Yeah We Can Trade That Just Fine
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    Date Published: 2018-10-05

    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
    October is historically the most volatile month of the year for stocks and 2018 is proving to be no different. On a stock specific note, Intel now has analysts strongly on two different sides -- either it is making a comeback or it has lost ground forever to AMD. That may mean more volatility, but that has in fact created a pattern for Intel. Here is a nice look at historical volatility by Month for the Dow Jones Industrial Average:

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    Starting in September, peaking in October, and lasting through out the rest of the year, this has been a bumpy time for stocks. That volatility can be bottled and tested. We do so for Intel, and the results have been quite strong.


    Intel Corporation (NASDAQ:INTC) Earnings

    In Intel Corporation, irrespective of whether the earnings move was large or small, if we waited one-day after earnings and then back-tested going long a slightly out of the money strangle (buying an out of the money call and an out of the money put) using the options closest to two-weeks from expiration, the results were quite strong.

    This back-test opens one-day after earnings were announced to try to find a stock that moves a lot after the earnings announcement.

    Here is the timing set-up around earnings:

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    Rules
    * Open the long 40 delta (out of the money) strangle one-calendar day after earnings.
    * Close the strangle 14 calendar days after earnings.
    * Use the options closest to 14 days from expiration.

    This is a straight down the middle volatility bet -- this trade wins if the stock is volatile the week following earnings and it will stand to lose if the stock is not volatile. This is not a silver bullet -- it's a trade that needs to be carefully examined.

    But, this is a stock direction neutral strategy, which is to say, it wins if the stock moves up or down -- it just has to move.

    RISK CONTROL
    Since blindly owning volatility 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 strangle 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 volatility early in the week rather than waiting to close 7-days later.

    RESULTS
    If we bought the out-of-the-money strangle in Intel Corporation (NASDAQ:INTC) over the last two-years but only held it after earnings we get these results:

    INTC
    Long 40 Delta Strangle


    % Wins: 87.5%
    Wins: 7 Losses: 1
    % Return: 236%

    We have a webinar this Saturday demonstrating how to find this pattern and others in the option market.

    You can learn more about it here: Pattern Recognition and Option Trading

    The mechanics of the TradeMachine® are that it uses end of day prices for every back-test entry and exit (every trigger).


    Looking at Averages

    The overall return was 236%; but the trade statistics tell us more with average trade results:

    ➡ The average return per trade was 35% over 14-days.
    ➡ The average return per winning trade was 47.4% over 14-days.
    ➡ The average return per losing trade was -51.6% over 14-days.

    Looking at the Last Year
    While we just looked at a multi-year back-test, we can also hone in on the most recent year with the same test:

    INTC
    Long 40 Delta Strangle


    % Wins: 75%
    Wins: 3 Losses: 1
    % Return: 116%

    Now we see a 116% return over the last year and a 75% win-rate.

    ➡ The average return for the last year per trade was 34.3% over 14-days.
    ➡ The average return for the last year per winning trade was 62.9% over 14-days.
    ➡ The average return per losing trade was -51.6% over 14-days.

    WHAT HAPPENED
    This is how people profit from the option market. Take a reasonable idea or hypothesis, test it, and apply lessons learned.

    You can learn more about it here: Pattern Recognition and Option Trading Webinar

    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.
     
  2. The latest AMD product refresh may not crack Intel's armor. But AMD 7nm may just do it.
     
  3. d08

    d08

    That's a nice backtest of less than 10 trades. Looks solid to me. What could go wrong.
     
    destriero likes this.
  4. CML_Ophir

    CML_Ophir

    yep, 7nm appears to be an inflection point