So I am completely new to the forum scene, including Elite Trader. I am a 20 year old who has been trading for several years, derivatives, specifically options for only the last 10 months or so. I thought I would pop on and see what you guys think of a strategy I have been working on and recently implemented in this last earnings season with a fair amount of success. The strategy itself and the type of trade is fairly standard, with seemingly incredibly high risk, although a substantial return, but including the ever looming possibility of a massive move that wipes out a significant portion of profit. However, I believe that through rigorous backtesting I have managed to find equities that are more often stable around earnings even though the inflated IV would suggest otherwise. I tested around 150 stocks, by hand, using TOS On Demand/Time Machine, and came up with 18 stocks that had a PoP over 85% over the last 22 earnings announcements, and losses that do not exceed twice the average gain. From this list I took the best 9 equities that had the best return on margin/capital, giving me an averaged PoP per quarter of just under 92% on 9 American equity strangles. My strangles are setup as follows: -Strangle is sold in last 20 minutes of market open prior to the earnings announcement -Expiration date is shortest possible -Strikes are calculated as adding/subtracting the market maker expected move (in this case using TOS) from the current price and rounding up/down to be conservative -Strangles are bought back the next day, either 5 minutes after market open or actually, as my backtesting has shown me, sometimes 20 minutes before market close. Many times the aggressive theta on short expiration options and the tendency for a price to retrace closer to its mean by day end makes selling before market close a viable and sometimes advantageous option, but only on some equities. I will do 9 of these a quarter, and I calculated using On Demand I would have made around 14% a quarter with 15k capital, taking into account that some of the announcements are on the same day and cannot be done at the same time. This is almost 60% a year, which seems significant to be pulling in regularly, thus troubling. Also my account is 6k, so very small, so this may impact the feedback you guys have, as I am technically undercapitalized. This quarter I was able to test 5 of these equity strangles, and I lost money on none of them. I made 6% on half of the equities I would usually do, as I simply was too late to execute the other half, the announcements had passed. The other interesting thing I like about this strategy is the lack of correlation to the stock market. If the markets are suffering, it shouldn't affect the earnings announcements of companies so drastically as to radically impact this strategy, although it may be less profitable. 14% a quarter is a big percentage to cut into before I am looking at negative returns. If I have missed some sort of forum etiquette that I need to be aware of, I apologize, but the internet should be informal anyway. Also, below is my profit table calculated using theoretical P/L for the last 22 quarters for 9 stocks, with the actual equities not included, but they are mostly banking, oilfield services, and tech companies. So, what do you guys think? Where are my blindspots?
FB would probably make it into your list before the last cycle. It was consistently moving less than the expected move, so selling strangles would work pretty well. We all know what happened in the last cycle.
I would personally make some stock prediction and put on a fly in that area to cap my risk and get margin relief vs strangle. Your captial seem light and even though the strategy has a positive expectancy, remember that that figure does not take into account the order in which that expectancy unfolds. ie you could lose the first 5 trades and now what.. you are cap constrained. Good luck w/ your journey....
That is a very good point, and I am somewhat concerned by this. Not much to be done unfortunately, without more money or drastically reducing position size.
Whats interesting is that FB has slipped up a few times with large losses in the past, not just this most recent, although that was dramatic. FB has ~80% PoP but the losses are significantly more than double the average gain. TSLA on the other hand...
Well you need to model what happens when you get an earnings miss and the stock drops 20-30%. Your back test filters that out but you will encounter it trading forward.