TradeMachine Pro – CML Option Back-Tester

 



 

Date Published: 2017-08-30

LEDE
This is a slightly advanced option trade that starts two calendar days after Adobe Systems Incorporated (NASDAQ:ADBE) earnings and lasts for the 19 calendar days to follow, that has been a winner for the last 3 years.

Adobe has earnings due out around September 19th, but that is not a confirmed date — just be aware that the announcement is in the next few weeks.

Adobe Systems Incorporated (NASDAQ:ADBE) Earnings
While we have had tremendous success by recognizing the pre-earnings momentum pattern that has over taken this bull market, we do need to consider a broad portfolio of option investments — and in this case we look at a back-test that is direction neutral.

For Adobe Systems Incorporated, irrespective of whether the earnings move was up or down, if we waited two-days after the stock move, and then sold a 3-week at out of the money iron condor (using monthly options), the results were quite strong. This trade opens two calendar after earnings were announced to try to let the stock find equilibrium after the earnings announcement.

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

 

Rules
* Open the short iron condor two calendar days after earnings

* Close the iron condor 21 calendar days after earnings

* Use the options closest to 30 days from expiration (but at least 21-days).

And a note before we see the results: This is a straight down the middle volatility bet — this trade wins if the stock is not volatile the three weeks following earnings and it will stand to lose if the stock is volatile.

RESULTS
If we sold this 30/10 delta iron condor in Adobe Systems Incorporated (NASDAQ:ADBE) over the last three-years but only held it after earnings we get these results:

ADBE: Short30 Delta / 10 Delta Iron Condor
% Wins: 100%
Wins:
12
Losses:
0
% Return:  223% 

Tap Here to See the Back-test

 

We see a 223% return, testing this over the last 12 earnings dates in Adobe Systems Incorporated. That’s a total of just 228 days (19 days for each earnings date, over 12 earnings dates).

Setting Expectations
While this strategy had an overall return of 223%, the trade details keep us in bounds with expectations:

The average percent return per trade was 18.6% over 19-days.

Looking at the Last Year
If we focus in on the last year, we see these results:

ADBE: Short30 Delta / 10 Delta Iron Condor
% Wins: 100%
Wins:
4
Losses:
0
% Return:  36.7% 

Tap Here to See the Back-test

 

The average percent return per trade was 13.7% over 19-days.

WHAT HAPPENED
This is it — this is how people profit from the option market — finding trading opportunities that avoid earnings risk and work equally well during a bull or bear market.

 

Date Published: 2017-08-16

LEDE
This is a slightly advanced option trade that starts three calendar days after Alibaba Group Holding Limited (NYSE:BABA) earnings and lasts for the 5 calendar days to follow, that has been a winner for the last 2-years.

Alibaba Group Holding Limited (NYSE:BABA) Earnings
Most of the trades we have examined have owned options, which is code for being “long volatility.” Remember, option trading is volatility trading, whether we mean it to be or not. This time we will look to balance the trade positions with a trade that is short volatility.

For Alibaba Group Holding Limited, irrespective of whether the earnings move was up or down, if we waited three-days after the stock move, and then sold a one-week at out of the money iron condor (using weekly options), the results were quite strong. This trade opens three calendar days after earnings were announced to try to let the stock find equilibrium after the earnings announcement.

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

 

Rules
* Open the short iron condor 3 calendar days after earnings

* Close the iron condor 7 calendar days after earnings

* Use the options closest to 7 days from expiration (but at least 7-days).

And a note before we see the results: This is a straight down the middle volatility bet — this trade wins if the stock is not volatile the week following earnings and it will stand to lose if the stock is volatile.

LOGIC AND RISK
The logic here is simply that after Alibaba does whatever it does after earnings, the stock will then fall into a quiet period for several days and this trade looks to benefit from that. We do however add an additional risk control with a 30% stop and a 30% limit:

 

In English, if the iron condor is ever up or down 30% before the closing date, this trade was closed ahead of time.

RESULTS
If we sold this 40/20 delta iron condor in Alibaba Group Holding Limited (NYSE:BABA) over the last three-years but only held it after earnings we get these results:

BABA: Short40 Delta / 20 Delta Iron Condor
% Wins: 100%
Wins:
7
Losses:
0
% Return:  111% 

Tap Here to See the Back-test

 

We see a 111% return, testing this over the last 7 earnings dates in Alibaba Group Holding Limited. That’s a total of just 44 days (4 days for each earnings date, over 7 earnings dates).

Setting Expectations
While this strategy had an overall return of 111%, the trade details keep us in bounds with expectations:

The average percent return per trade was 14.7% over 4-days.

THE LAST YEAR
Obviously the trade has also won each of the last four earnings cycles (since it was a winner for the last seven), but we can look at the average returns as well:

BABA: Short40 Delta / 20 Delta Iron Condor
% Wins: 100%
Wins:
4
Losses:
0
% Return:  54.9% 

Tap Here to See the Back-test

 

The average percent return per trade was 15.2% over 4-days.

WHAT HAPPENED
This is it — this is how people profit from the option market — finding trading opportunities that avoid earnings risk and work equally well during a bull or bear market.

 

Date Published: 2017-08-13

PREFACE
There is a bullish momentum pattern in Broadcom Limited (NASDAQ:AVGO) stock 6 calendar days before earnings, and we can capture that phenomenon explicitly by looking at returns in the option market.

The strategy won’t work forever, and in fact, it has won as often as it has lost over the last year, but since the winning trades are so much larger than the losing trades, it has returned 444% over the last 3-years and 22% over the last year

LOGIC
In a bull market there can be a stock rise ahead of earnings on optimism, or upward momentum, that sets in the one-week before an earnings date.
Now we can see it in Broadcom Limited.

The Bullish Option Trade Before Earnings in Broadcom Limited
We will examine the outcome of getting long a call option (with two-weeks to expiry) in Broadcom Limited 6 days before earnings (using calendar days) and selling the call before the earnings announcement.

Here’s the set-up in great clarity; again, note that the trade closes before earnings, so this trade does not make a bet on the earnings result because AVGO reports earnings after the close of trading on its earnings day (projected as 8-24-2017 by NASDAQ)

 

6 calendar days before 8-24-2017 would be 8-18-2017.

Risk Control
We will test a strict risk control which imposes a 50% stop loss and a 50% limit gain. Here is that set up:

 

In English, if at any point the long call loses half of its value, the trade was closed, attempting to avoid a total loss. At the same time, if the long call rises 50% in value at any tine, then it was also closed to lock in the gain. This stop and limit could trigger the trade to close before the final day.

Here are the results over the last three-years in Broadcom Limited:

AVGO: Long 40 Delta Call
% Wins: 83.3%
Wins:
10
Losses:
2
% Return:  444% 

Tap Here to See the Back-test

 

We see a 444% return, testing this over the last 12 earnings dates in Broadcom Limited. That’s a total of just 84 days (7-days for each earnings date, over 12 earnings dates). This has been the results of following the trend of bullish sentiment into earnings while avoiding the actual earnings result.

We can also see that this strategy hasn’t been a winner all the time, rather it has won 10 times and lost 2 times, for an 83% win-rate

The trade will lose sometimes, but over the recent trading history, this momentum and optimism options trade has won ahead of earnings.

Setting Expectations
While this strategy had an overall return of 444%, the trade details keep us in bounds with expectations:

The average percent return per trade was 30.8%.

The average percent return per winning trade was 43.9%.

The average percent return per winning trade was -34.6%.

A PERFORMANCE NOTE
For quite some time in the past and even the very recent history, these pre-earnings momentum investments have been winners. We saw them explicitly in just the last few weeks in Alphabet (GOOGL), Marriott (MAR) and just last week in Nvidia (NVDA). But, if we look at the most recent year for AVGO, the trade actually hasn’t been overwhelmingly good:

AVGO: Long 40 Delta Call
% Wins: 50%
Wins:
2
Losses:
2
% Return:  21.7% 

Tap Here to See the Back-test

 

With the recent market turbulence, a straight down the middle bullish bet could get derailed by exogenous forces that, while they are not stock market specific, are just as disruptive and could push a loss trigger quickly.

But, for a fuller view, AVGO is one of the leading technology companies and has seen its stock follow the bullish pattern that much of mega tech has seen. Here is a two-year stock return chart with AVGO in red and the Nasdaq 100 (QQQ) in yellow.

 

This is one of those set-ups were the win-rate over the long-run is higher than the lose rate, and the size of the winning trades
(in percent) is also larger
than the losing trades, but, it’s a probability play, not a sure thing. Having said that, GOOGL, MAR, and NVDA have left a nice backdrop.

WHAT HAPPENED
Bull markets tend to create optimism, whether it’s deserved or not. This has been a tradable phenomenon in Broadcom.

 

Date Published: 2017-08-10

LEDE
This is a slightly advanced option trade that bets on volatility for a period that starts one-day after NVIDIA Corporation (NASDAQ:NVDA) earnings and lasts for the 6 calendar days to follow, that has been a winner for the last 2 years. We note the use of strict risk controls in this analysis.

Nvidia has earnings due out today (8-10-2017) after the close. One day after earnings would be 8-11-2017.

NVIDIA Corporation (NASDAQ:NVDA) Earnings
Trading the bullish momentum pattern ahead of earnings with a long call and closing yesterday (one-day before earnings) turned out to be a nice winner — Nvidia stock followed its pattern. Now we look at another strategy that owns options, but this time takes no direction bias.

In NVIDIA Corporation, irrespective of whether the earnings move was large or small, if we waited one-day after earnings and then bought a one-week straddle (using weekly options), the results were quite strong. This trade opens one-day after earnings were announced to try to find a stock that moves a lot after the earnings announcement.

Simply owning options after earnings, blindly, is likely not a good trade, but hand-picking the times and the stocks to do it in can be useful. We can test this approach without bias with a custom option back-test. Here is the timing set-up around earnings:

 

Rules

* Open the long straddle one-calendar day after earnings.
* Close the straddle 7 calendar days after earnings.
* Use the options closest to 7 days from expiration (but at least 7-days).

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.

 

In English, at the close of every trading day, if the straddle 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 straddle in NVIDIA Corporation (NASDAQ:NVDA) over the last two-years but only held it after earnings we get these results:

NVDA: Long Straddle
% Wins: 71%
Wins:
5
Losses:
2
% Return:  167.7% 

Tap Here to See the Back-test

 

We see a 167.7% return, testing this over the last 7 earnings dates in NVIDIA Corporation. That’s a total of just 42 days (6 days for each earnings date, over 7 earnings dates).
That’s an annualized rate of 1,457%.

Looking at Averages
The overall return was 167.7%; but the trade statistics tell us more with average trade results:

The average return per trade was 21.06% over 6-days.

The average return per winning trade was 40.69% over 6-days.

The average return per losing trade was -28.02% over 6-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:

NVDA: Long Straddle
% Wins: 75%
Wins:
3
Losses:
1
% Return:  126% 

Tap Here to See the Back-test

 

Now we see a 126% return over the last year and a 75% win-rate.

The average return for the last year per trade was 23.99% over 6-days.

The average return for the last year per winning trade was 46.66% over 6-days.

The average return per losing trade was -43.99% over 6-days.

An Alternative
For the the more advanced option trader, a similar approach to this strategy would be to sell a strangle around this straddle turning it into an iron butterfly. You can test this approach in the CML Trade Machine™ Pro (option back-tester).

WHAT HAPPENED
This is it — this is how people profit from the option market — finding trading opportunities that avoid earnings risk and work equally well during a bull or bear market.

 

Date Published: 2017-08-7

PREFACE
With sizeable wins in Alphabet Inc (NASDAQ:GOOGL) and Marriott International Inc (NASDAQ:MAR), we continue to look for winning patterns of bullish momentum ahead of earnings. Momo Inc is our next company to examine, with earnings due out 8-22-2017 before the market opens according to NASDAQ.

We have the same disclaimer as always which is that this is a short-term swing trade, it won’t be a winner forever, and it can be easily derailed by a couple of down days in the market irrespective of Momo Inc news, but for now it has shown a repeating success that has not only returned 208% over the last two-years, it has also shown a win-rate of 75%.

For the record, Momo Inc. operates as a mobile-based social networking platform in the People’s Republic of China, so volatility could be here.

IDEA
As always, we start by defining a simple idea — trying to take advantage of a pattern in short-term bullishness just before earnings, and then getting out of the way so no actual earnings risk is taken.

The Short-term Option Swing Trade Ahead of Earnings in Momo Inc
We will examine the outcome of going long a weekly call option in Momo Inc just three calendar days before earnings and selling the call one day before the actual news.

 

Below we present the back-test stats over the last two-years in Momo Inc:

MOMO: Long 40 Delta Call
% Wins: 75%
Wins:
6
Losses:
2
% Return:  208% 

Tap here to see the back-test

 

We see a 208% return, testing this over the last 8 earnings dates in Momo Inc. That’s a total of just 16 days (2-day holding period for each earnings date, over 8 earnings dates). That’s the power of following the short-term pattern of bullishness ahead earnings — and not taking on the actual risk from the earnings outcome.

This short-term trade hasn’t won every time, and it won’t, but it has been a winner 6 times and lost 6 times, for a 75% win-rate.

Setting Expectations
While this strategy has an overall return of 208%, the trade details keep us in bounds with expectations:

The average percent return per trade was 26.6%.
The average trade percent return per winning trade was 52.4%.
The average percent return per losing trade was -50.7%.

Looking at More Recent History
We did a multi-year back-test above, now we can look at just the last year:

MOMO: Long 40 Delta Call
% Wins: 75%
Wins:
3
Losses:
1
% Return:  398% 

Tap here to see the back-test

 

We’re now looking at 398% returns, on 3 winning trades and 1 losing trade.

The average percent return per trade was 65.4%.
The average trade percent return per winning trade was 96%.
The average percent return per losing trade (which was one-trade) was -26.5%.

This is generally the idea: Take a trade that wins more often than it loses and where the gains for the winning trades are also larger than the losses from the losing trades. Creating portfolio of these types of results will create edge.

WHAT HAPPENED
Bull markets tend to create optimism, whether it’s deserved or not. This has been a tradable phenomenon in Momo.

 

Date Published: 2017-07-30

PREFACE
This is a short-term swing trade, it won’t be a winner forever, and it can be easily derailed by a couple of down days in the market irrespective of Quintiles Transitional Holdings Inc (NYSE:Q) news, but for now it has shown a repeating success that has not only returned 364% over the last 3-years, but has also shown a win-rate of 90.9% over those 3-years, and has won all the last 4 earnings cycles.

According to NASDAQ, Quintiles IMS Holdings is due to have earnings on August 3rd, before the market opens, and that means “3-days before earnings” would be July 31st.

IDEA
The idea is quite simple — trying to take advantage of a pattern in short-term bullishness just before earnings, and then getting out of the way so no actual earnings risk is taken.

The Short-term Option Swing Trade Ahead of Earnings in Quintiles Transitional Holdings Inc

We will examine the outcome of going long a monthly call option in Quintiles Transitional Holdings Inc just three calendar days before earnings and selling the call one day before the actual news. (Quintiles IMS Holdings, Inc. provides integrated information and technology-enabled healthcare services in the Americas, Europe, Africa, and the Asia-Pacific.)

This is construct of the trade, noting that the short-term trade closes before earnings and therefore does not take a position on the earnings result.

 

Below we present the back-test stats over the last three-years in Quintiles Transitional Holdings Inc:

Q: Long 50 Delta Call
% Wins: 90.9%
Wins:
10
Losses:
1
% Return:  364% 

Tap here to go to the back-test

 

We see a 364% return, testing this over the last 11 earnings dates in Quintiles Transitional Holdings Inc. That’s a total of just 22 days (2-day holding period for each earnings date, over 12 earnings dates).

This short-term trade hasn’t won every time, and it won’t, but it has been a winner 11 times and lost 1 time, for a 90.9% win-rate and again, that 364% return in less than one-full month of actual holding period.

The trade will lose sometimes, and since it is such a short-term position, it can lose from news that moves the whole market that has nothing to do with Quintiles Transitional Holdings Inc, but over the recent history, this bullish option trade has won ahead of earnings.

Setting Expectations
While this strategy has an overall return of 364%, the trade details keep us in bounds with expectations:

The average percent return per trade was 25.5%.

Looking at More Recent History
We did a multi-year back-test above, now we can look at just the 13-months (to capture 4 earnings cycles):

Q: Long 50 Delta Call
% Wins: 100%
Wins:
4
Losses:
0
% Return:  41.5% 

Tap here to go to the back-test

 

We’re now looking at 41.5% returns, on 4 winning trades and 0 losing trades.

The average percent return over the last year per trade was 22.4%.

THINGS TO NOTE
This company’s options are not very liquid — in fact it only averages 570 option contracts traded a day. The execution price is critical to all trades, but in particular when trading options with wide spreads. We note the possibility that a good fill may turn out to be quite difficult, and if that’s the case, then this trade would likely just be a “don’t trade” for some investors.

WHAT HAPPENED
The pattern of this bull market reveals a bullish run up before earnings in the very short-term — independent of the realized earnings result. This has been a tradable phenomenon in Quintiles Transitional Holdings Inc.

Date Published: 2017-07-25

Written by Ophir Gottlieb

LEDE
Alphabet Inc (NASDAQ:GOOGL) followed its pre-earnings pattern beautifully that we discussed in a prior dossier, where the stock tends to rally into earnings and owning a call for just the two-weeks ahead of earnings was a winner and it’s now time to look at the after-earnings trade pattern. For the pre-earnings trade, this time around, that earnings momentum play returned 117%.

GOOGL: Long 40 delta Call
% Wins: 100%
Wins:
1
Losses:
0
% Return:  117% 

 

And this is how that trade looked for the prior two-years:

 

But now it’s time to investigate Alphabet’s post-earnings patterns, and we do that with a short put spread.

The Trade After Earnings
Selling a put spread every month in a stock that is rising, in hindsight, obviously looks like a great idea. But, there is a lot of risk in that trade, namely, the risk of an abrupt stock drop and a market sell-off that takes all stocks with it. So, we want to reduce the risk while not affecting the returns.

One of our go to trade set-ups starts by asking the question if trading every month is worth it — is it profitable — is it worth the risk? There’s an action plan that measures this exactly, and the results are powerful for Alphabet Inc.

Let’s test the idea of selling a put spread only in the month after earnings. Here’s what we mean:

 

Our idea here is that after earnings are reported, and after the stock does all of its gymnastics, up or down, that three-days following the earnings move and for the next month, the stock is then in a quiet period.

If it gapped down — that gap is over. If it beat earnings, the downside move is already likely muted. Here is the set-up:

 

More explicitly, the rules are:

Rules
* Open short put spread 3 calendar days after earnings.
* Close short put spread 30 calendar days later.
* Use the option that is closest to but greater than 30-days away from expiration.

And here are the results of implementing this much finer strategy over the last three-years:

GOOGL: Short 25/15 Delta Put Spread
% Wins: 91.7%
Wins:
11
Losses:
1
% Return:  218% 

Tap Here to See the Actual Back-test

 

We see a 218% winner that only traded the month following earnings and took no risk at all other times. The trade has won 11 out of the 12 last earnings cycles times, or a 91.7% win-rate.

Here is how the strategy has done over the last year:

GOOGL: Short 25/15 Delta Put Spread
% Wins: 100%
Wins:
4
Losses:
0
% Return:  51.1% 

Tap Here to See the Actual Back-test

 

Now we a 51.1% return on just four full months of trading.

The results are incredibly consistent, so much so that we need to take a step back and still examine the potential pitfalls here.

NO GUARANTEES
There are no guarantees to this trade, but it does appear to a very high probability investment, but even as such, it does have some drawbacks. If we look at the last three-months ago , we actually tested this trade (May 2017):

 

That is, selling a 910/892.5 put spread @ $2.63. This trade, as constructed, had a maximum win amount of $2.63 (the credit received), but it had a maximum loss of $14.87, which is the difference in the strikes (910 – 892.5) minus the credit received ($2.63). That means the max gain: max loss ratio was 1:5.6.

And yes, the trade worked out well, closing that February for $0.03. But, we do, at the very least, need to be aware of the trade we are examining.

MANAGING EXPECTATIONS
We recently added the average win percent per trade to the trade details section of the Trade Machine™ Pro, and this is what we see with this trade over the last 2-years:

 

In English, the average trade returned 14.9%. It was the accumulation of these short-term 15% wins that has created a total back-test with a massive return.

We also note that when GOOGL has these bad reactions off of earnings, it hes worked best to wait the full three-days for the stock to calm down before entering this post-earnings set-up.

WHAT HAPPENED
This is it. This is just one of the ways people profit from the option market.

 

Date Published: 2017-07-21

PREFACE
Following the bullish optimism patterns ahead of earnings we have looked at in Apple, Facebook, Alphabet and Nvidia, we can also do the same with Lam Research Corporation (NASDAQ:LRCX). But this is a back-test of a two-day trade, rather than our usual week or two-week trades for pre-earnings moves.

The strategy won’t work forever (it really won’t), but in the last 2-years it has won 6 times and only lost 2 times. Over the last year it has won 3 times and lost only once.

We see a projected date of 7-26-2017 for Lam Research Corporation, after the market closes.

PREMISE
The premise is simple — one of the least recognized but most important phenomena surrounding this bull market is the amount of optimism, or upward momentum, that sets in the week before an earnings announcement. Now we can see it in Lam Research Corporation (NASDAQ:LRCX).

The Options Optimism Trade Before Earnings
Let’s look at the results of buying a slightly out of the money monthly call option in Lam Research 2-days before earnings and selling the call on the day of the earnings announcement (but before the actual announcement).

Here’s the set-up in great clarity; again, note that the trade closes before earnings, so this trade does not make a bet on the earnings result.

 

Further, we will test a tight stop loss on this call at 30%:

 

Now, unlike many of our other set-ups, this is in fact a straight down the middle bullish bet — this absolutely takes on directional stock risk, so let’s be conscious of that before we see the results, because they are mind bending.

Here are the results over the last two-years in Lam Research Corporation, buying the monthly 40 delta call with a 30% stop loss:

LRCX: Long 40 Delta Monthly Call
% Wins: 75%
Wins:
6
Losses:
2
% Return:  273% 

Tap here to see the back-test in action

 

We see a 273% return, testing this over the last 8 earnings dates. We can also see that this strategy hasn’t been a winner all the time, rather it has won 6 times and lost 2 times, for a 75% win-rate.

Checking More Time Periods
Now we can look at just the last year as well:

LRCX: Long 40 Delta Monthly Call
% Wins: 100%
Wins:
3
Losses:
1
% Return:  162% 

Tap here to see the back-test in action

 

We’re now looking at 162% returns, on 3 winning trades and 1 losing trade. It’s worth noting again that we are only talking about two-days of trading for each earnings release, so this is 162% in just 8-days of total trading.

THE RISK
This trade would open this time around on Monday, 7-24-2017 and close right at the close (or near the close) on 7-26-2017, unless a stop loss is triggered before. All of that sounds nice and neat, but it really does have more risk than that. Since we are just looking at a monthly option two-days before earnings, a gap down move in between trading days could reveal a loss worse than 30%.

For the record, here are the average wins and losses over two-tears and then one-year (this is a new feature in CML Trade Machine™ Pro):

Two-Years

 

 

It’s good to understand the expected “good case scenario” return on these calls — this is not a large move trade, this is one where it would be marked as a significant success if a $5.00 call rises to $6.50 or higher. That would be 30% in two-days.

WHAT HAPPENED
The personality of this bull market is one that shows optimism before earnings — irrespective of the actual earnings result. That has been a tradable phenomenon in several companies with the right tools to find the opportunities.

 

 

Date Published: 2017-07-20

PREFACE
There is a powerful pattern of optimism and momentum in NVIDIA Corporation (NASDAQ:NVDA) stock right before of earnings, and we can capture that pattern by looking at returns in the option market.

If ever there was a momentum stock, Nvidia fits the bill. It’s historic rise has come on the back of legitimate fundamental growth, but for now, we want to focus on momentum, and there is a fascinating pattern that has emerged.

The strategy won’t work forever (it really won’t), but in the last 3-years it has won 11 times and only lost once. Over the last two-years it has won 8 times and never lost. But, after we look at this trade, we have a wrinkle which has made it even better for those looking to take less risk.

PREMISE
The premise is simple — one of the least recognized but most important phenomena surrounding this bull market is the amount of optimism, or upward momentum, that sets in the week before an earnings announcement. Now we can see it in NVIDIA Corporation.

The Options Optimism Trade Before Earnings in NVIDIA Corporation

Let’s look at the results of buying a monthly call option in NVIDIA Corporation 7-days before earnings and selling the call one day before the earnings announcement.

Here’s the set-up in great clarity; again, note that the trade closes before earnings, so this trade does not make a bet on the earnings result.

 

Now, unlike many of our other set-ups, this is in fact a straight down the middle bullish bet — this absolutely takes on directional stock risk, so let’s be conscious of that before we see the results, because they are mind bending.

Here are the results over the last three-years in NVIDIA Corporation:

NVDA: Long 50 Delta Call
% Wins: 91.7%
Wins:
11
Losses:
1
% Return:  286% 

Tap here to see the back-test in action

 

We see a 286% return, testing this over the last 12 earnings dates in NVIDIA Corporation. We can also see that this strategy hasn’t been a winner all the time, rather it has won 11 times and lost 1 time, for a 91.7% win-rate.

Checking More Time Periods in NVIDIA Corporation
Now we can look at just the last year as well:

NVDA: Long 50 Delta Call
% Wins: 100%
Wins:
4
Losses:
0
% Return:  60.1% 

Tap here to see the back-test in action

 

We’re now looking at 60.1% returns, on 4 winning trades and 1 losing trade. It’s worth noting again that we are only talking about one-weeks of trading for each earnings release, so this is 60.1% in just 4-weeks of total trading.

MAKING IT BETTER
Another approach here is to turn that naked long call into a call spread. The win-rates are identical, but the trade simply risks a little less. Here are the results over the last year for the 40/20 debit call spread:

NVDA: Long 40 /20 Delta Call Spread
% Wins: 100%
Wins:
4
Losses:
0
% Return:  53.6% 

Tap here to see the back-test in action

 

For the record, it also has 11 wins and 1 loss over the last 3-years (Back-test link), just like the naked long call. Also note that this is only “less risk” if size is the same by contract.

So, owning 10 calls is more risky than owning 10 call spreads because there is less capital at risk.

WHAT HAPPENED
Bull markets have quirks, or personalities if you like.

The personality of this bull market is one that shows optimism before earnings — irrespective of the actual earnings result. That has been a tradable phenomenon in NVIDIA Corporation.

 

Date Published: 2017-07-18

Preface
With the market’s direction becoming tenuous, we can explore option trading opportunities in Starbucks Corporation (NASDAQ:SBUX) that do not rely on stock direction but do trade around earnings.

It turns out, over the long-run, for stocks with certain tendencies like Starbucks Corporation, there is a clever way to trade market anxiety or market optimism before earnings announcements with options.

This approach has returned 112% with a total holding period of just 84 days, or an annualized rate of 487%. Now that’s worth looking into.

Starbucks earnings are expected 7-27-2017, after the market closes.

The Trade Before Earnings
What a trader wants to do is to see the results of buying an at the money straddle a few days before earnings, and then sell that straddle just before earnings. Ideally we would see a high win-rate, a high return, and small losses when the trade goes wrong, and we get all of that when examining Starbucks.

This trade is not a panacea, which is to say, we have to test it, stock by stock, to see when and why it worked. Let’s start with Starbucks.

Here is the setup:

 

We are testing opening the position 6 calendar days before earnings and then closing the position the day of earnings. Since Starbucks reports earnings after the market closes, 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 at-the-money straddle:

Returns
If we did this long at-the-money (also called ’50-delta’) straddle in Starbucks Corporation (NASDAQ:SBUX) over the last three-years but only held it before earnings we get these results:

SBUXLong At-the-Money Straddle
% Wins: 83.3%
Wins:
10
Losses:
2
% Return:  112% 
% Annualized:  487% 

See this back-test in action

 

We see a 112% return, testing this over the last 12 earnings dates in Starbucks Corporation. That’s a total of just 84 days (7 days for each earnings date, over 12 earnings dates). That’s an annualized rate of 487%.

We can also see that this strategy hasn’t been a winner all the time, rather it has won 10 times and lost 2 times, for am 83% win-rate and again, that 112% return in less than two-full months of trading.

Looking at Recent Results
We can do this same test but look at the last year, rather than the last 3-years. Here are those results:

SBUXLong At-the-Money Straddle
% Wins: 83.3%
Wins:
4
Losses:
0
% Return:  62.1% 
% Annualized:  809% 

See this back-test in action

 

This pre-earnings long volatility trade has stare to find some momentum and has won each of the last four earnings cycles after going with 2 wins and 2 losses in the year prior (2-years ago).

MORE TO IT THAN MEETS THE EYE
While this strategy is benefiting from the implied volatility rise into earnings, what it’s really doing is far more intelligent.

The option prices for the at-the-money straddle will show very little time decay over this 7-day period,
so what this strategy really does is buy “seven days” of potential stock movement with what is actually
fairly small downside risk.

WHAT HAPPENED
This is it — this is how people profit from the option market — finding trading opportunities that avoid earnings risk and work equally well during a bull or bear market.

 

Date Published: 2017-07-17

PREFACE
With Lumentum Holdings Inc (NASDAQ:LITE) stock up 190% over the last two-years, there is a powerful pattern of optimism and momentum two-weeks before of earnings, and we can capture that pattern by looking at returns in the option market.

The strategy won’t work forever, but for now it is a momentum play that has not only returned 5,700% annualized returns, but has also shown a high win-rate of 71%.

PREMISE
The premise is simple — one of the least recognized but most important phenomena surrounding this bull market is the amount of optimism, or upward momentum, that sets in the two-weeks before an earnings announcement. Now we can see it in Lumentum Holdings Inc.

 

The Options Optimism Trade Before Earnings in Lumentum Holdings Inc

Let’s look at the results of buying a monthly call option in Lumentum Holdings Inc two-weeks before earnings and selling the call before the earnings announcement.

Here’s the set-up in great clarity; again, note that the trade closes before earnings, so this trade does not make a bet on the earnings result.

 

Now, unlike many of our other set-ups, this is in fact a straight down the middle bullish bet — this absolutely takes on directional stock risk, so let’s be conscious of that before we see the results, because they are quite good.

Here are the results over the last two-years in Lumentum Holdings Inc:

LITE: Long 40 Delta Call
% Wins: 71%
Wins:
5
Losses:
2
% Return:  358% 
% Annualized:  1335% 

See the back-test in action

 

We see a 1550% return, testing this over the last 7 earnings dates in Lumentum Holdings Inc. That’s a total of just 98 days (14 days for each earnings date, over 7 earnings dates). That’s an annualized rate of 1335%. That’s the power of following the trend of optimism into earnings — and never even worrying about the actual earnings result.

We can also see that this strategy hasn’t been a winner all the time, rather it has won 5 times and lost 2 times, for a 71% win-rate and again, that 1550% return in less than six-full months of trading.

RISK REDUCTION
We didn’t mention it yet, but all of these back-tests were actually risk reduced. We have put in a 50% stop loss in all of these trades, which means that if the long call ever loses half of its value, we close the position out, and move on. Here’s how we did it:

 

Using risk protections is a valuable step in trading.

WHAT HAPPENED
This is it. This is just one of the ways people profit from the option market — optimize returns and reduce risk.

 

 

LEDE
Wells Fargo & Co (NYSE:WFC) has earnings due out on July 14, 2017 before the market opens. And, just like our prior dossier on JPMorgan, the real opportunity with options isn’t earnings — it’s right after earnings — and we see a trade that has won three straight years without a loss, returning 154%.

The Trade After Earnings

One of our go to trade set-ups starts by asking the question if trading every month is worth it — is it profitable — is it worth the risk? There’s an action plan that measures this exactly, and the results are powerful not just for Wells Fargo & Co(NYSE:WFC) but also for JPMorgan, where it has won for three straight years without a loss.

Let’s test the idea of selling a put spread only in the month after earnings. Here’s what we mean:

 

Our idea here is that after earnings are reported, and after the stock does all of its gymnastics, up or down, that two-days following the earnings move and for the next month, the stock is then in a quiet period.

If it gapped down — that gap is over. If it beat earnings, the downside move is already likely muted. Here is the set-up:

 

More explicitly, the rules are:

Rules
* Open short put spread 2 calendar days after earnings.

* Close short put spread 30 calendar days later.

* Use the option that is closest to but greater than 35-days away from expiration.

And here are the results of implementing this much finer strategy over the last three-years:

WFC: Short 40/20 Delta Put Spread
% Wins: 100%
Wins:
11
Losses:
0
% Return:  154% 

Tap Here to See the Actual Back-test

 

We see a 154% winner that only traded the month following earnings and took no risk at all other times. The trade has won all 11 of the last 11 earnings cycles times, or a 100% win-rate.

Here is how the strategy has done over the last year:

WFC: Short 40/20 Delta Put Spread
% Wins: 100%
Wins:
4
Losses:
0
% Return:  103% 

Tap Here to See the Actual Back-test

 

Now we a 103% return on just four full months of trading.

Here’s what we see over the last six-months:

WFC: Short 40/20 Delta Put Spread
% Wins: 100%
Wins:
2
Losses:
0
% Return:  44.3% 

Tap Here to See the Actual Back-test

 

Now we see a 44.3% return over the last two earnings cycles, winning both times.

The results are incredibly consistent, so much so that we need to take a step back and still examine the potential pitfalls here.

NO GUARANTEES
There are no guarantees to this trade, but it does appear to a very high probability investment, but even as such, it does have some drawbacks. If we look at the trade six-months ago in this back-test, we actually tested this trade (January 2017):

 

That is, selling a 52.5/50 put spread @ $0.56. This trade, as constructed, had a maximum win amount of $0.56 (the credit received), but it had a maximum loss of $1.94, which is the difference in the strikes (52.50 – 50) minus the credit received ($0.56). That means the max gain: max loss ratio was about 1:4.

And yes, the trade worked out well, closing that February for $0.02. But, we do, at the very least, need to be aware of the trade we are examining.

TAKING RISK OFF
One clever way to get that max profit: max loss ratio back to something more manageable, is to put in a stop loss at the exact amount of credit we received. In Trade Machine™ Pro, the way to test this is to put in a 100% stop loss, like this:

 

In English, if we took that same trade from January 2017, and put a stop loss in at $1.12 (which is a 100% loss relative to the $0.56 credit), then our max gain would have been $0.56 (the credit) and the max loss would have been $0.56 (the credit – stop).

All of a sudden, we have a 1:1 max gain: max loss trade, and over the last year, which was four post earnings trades, the results are identical to the trade without a stop loss. Not too shabby.

WHAT HAPPENED
This is it. This is just one of the ways people profit from the option market. There are more that we reveal and discuss.

 

Date Published: 2017-07-09
LEDE
JPMorgan Chase & Co.(NYSE:JPM) has earnings due out on July 14, 2017 before the market opens. But, the real opportunity with options isn’t earnings — it’s right after earnings — and we see a trade that has won for three-straight years without a single loss, returning 167%.

The Trade After Earnings
Selling a put spread every month in a stock that is rising, in hindsight, obviously looks like a great idea. But, there is a lot of risk in that trade, namely, the risk of an abrupt stock drop and a market sell-off that takes all stocks with it. So, we want to reduce the risk while not affecting the returns.

One of our go to trade set-ups starts by asking the question if trading every month is worth it — is it profitable — is it worth the risk? There’s an action plan that measures this exactly, and the results are powerful not just for Red Hat Inc, but for JPMorgan Chase & Co.

Let’s test the idea of selling a put spread only in the month after earnings. Here’s what we mean:

 

Our idea here is that after earnings are reported, and after the stock does all of its gymnastics, up or down, that two-days following the earnings move and for the next month, the stock is then in a quiet period.

If it gapped down — that gap is over. If it beat earnings, the downside move is already likely muted. Here is the set-up:

 

More explicitly, the rules are:

Rules
* Open short put spread 2 calendar days after earnings.

* Close short put spread 30 calendar days later.

* Use the option that is closest to but greater than 35-days away from expiration.

And here are the results of implementing this much finer strategy over the last three-years:

JPM: Short 35/10 Delta Put Spread
% Wins: 100%
Wins:
12
Losses:
0
% Return:  167% 

Tap Here to See the Actual Back-test

 

We see a 167% winner that only traded the month following earnings and took no risk at all other times. The trade has won all 12 of the last 12 earnings cycles times, or a 100% win-rate.

Here is how the strategy has done over the last year:

JPM: Short 35/10 Delta Put Spread
% Wins: 100%
Wins:
4
Losses:
0
% Return:  69.3% 

Tap Here to See the Actual Back-test

 

Now we a 69.3% return on just four full months of trading.

Here’s what we see over the last six-months:

JPM: Short 35/10 Delta Put Spread
% Wins: 100%
Wins:
2
Losses:
0
% Return:  36.4% 

Tap Here to See the Actual Back-test

 

Now we see a 36.4% return over the last two earnings cycles, winning both times.

The results are incredibly consistent, so much so that we need to take a step back and still examine the potential pitfalls here.

NO GUARANTEES
There are no guarantees to this trade, but it does appear to a very high probability investment, but even as such, it does have some drawbacks. If we look at the trade six-months ago in this back-test, we actually tested this trade (January 2017):

 

That is, selling an 81.5/76.5 put spread @ $1.00. This trade, as constructed, had a maximum win amount of $1 (the credit received), but it had a maximum loss of $4, which is the difference in the strikes (81.5 – 76.5) minus the credit received ($1). That means the max gain: max loss ratio was 1:4.

And yes, the trade worked out well, closing that February for $0.10. But, we do, at the very least, need to be aware of the trade we are examining.

TAKING RISK OFF
One clever way to get that max profit: max loss ratio back to something more manageable, is to put in a stop loss at the exact amount of credit we received. In Trade Machine™ Pro, the way to test this is to put in a 100% stop loss, like this:

 

In English, if we took that same trade from January 2017, and put a stop loss in at $2 (which is a 100% loss relative to the $1 credit), then our max gain would have been $1 (the credit) and the max loss would have been $1 (the credit – stop).

All of a sudden, we have a 1:1 max gain: max loss trade, and over the last year, which was four post earnings trades, the results are identical to the trade without a stop loss. Not too shabby.

WHAT HAPPENED
This is it. This is just one of the ways people profit from the option market — optimize returns and reduce risk. To see how to do this for any stock and for any strategy, including covered calls, with just the click of a few buttons, we welcome you to watch this quick demonstration video:

 

Date Published: 2017-07-06

Lede
With the market’s direction becoming tenuous, we can explore option trading opportunities in Apple Inc (NASDAQ:AAPL) that do not rely on stock direction.

It turns out, that over the long-run, for stocks with certain tendencies like Apple Inc, there is a clever way to trade market anxiety or optimism before earnings announcements with options.

Note: Apple Inc has announced that it will release its next earnings report on August 1, 2017.

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

The goal, is benefit from a unique period where over a 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.

Here is the setup:

 

We are testing opening the position 6 days before earnings and then closing the position the day of earnings, but before the news. This is not making any earnings bet. This is not making any stock direction bet. Since Apple Inc releases earnings after the market closes, we can use the ‘0’ days before earnings setting, otherwise we would use ‘1’ day before earnings.

Here are the results over the last two-years in Apple:

AAPLLong At-the-Money Straddle
% Wins: 87.50%
Wins:
7
Losses:
1
% Return:  59.3% 
% Annualized:  400.8% 

Go to the back-test link

 

We see a 59.3% return, testing this over the last 9 earnings dates in Apple Inc. That’s a total of just 54 days (6 days for each earnings date, over 9 earnings dates). That’s an annualized rate of 400.8%. We note that one of the trades was break even, so it does not show up in either the win or loss column.

We can also see that this strategy hasn’t been a winner all the time, rather it has won 7 times and lost 1 time, for an 87.5% win-rate, or 77.8% if we include the trade that was breakeven.

Note on Risk Reduction
As a point of note, when we run this back-test using a limit gain of 25% and a stop loss of 25%, or in English, we close the position if it is ever up 20% in six-days or down 20% in the six-days:

 

WHAT HAPPENED
This is it — this is how people profit from the option market — finding trading opportunities that avoid earnings risk and work equally well during a bull or bear market.


 

Published: 2017-07-03

PREFACE
There is an advanced option trade in Alibaba Group Holding Limited (NYSE:BABA) before earnings that takes no stock direction risk, no earnings risk,
and reduces even the volatility risk.

The strategy has won for two-straight years without a loss and has 1,337% annualized returns.

This is it — this is how people profit from the option market. Identifying strategies that don’t rely on a bull or bear market.

TRADE TIMING
This is for the advanced option trader, just note that this has a few steps to it. First we start with the timing:

We want to look at a very short window, specifically opening a trade six-days before an earnings announcement and closing it the day before. Here it is plainly:

 

So, to be clear — this trade does not take on the risk of earnings, it closes before earnings.

TRADE SET-UP
With the timing set, we now construct the trade in with these rules:

* Buy the at-the-money straddle with a 30-day expiration (or closest to it)
* Sell an at-the-money straddle with a 7-day expiration (or closest to it)
* Both of these straddles have expirations after earnings.

Here’s how this looks, plainly:

 

And here is the reasoning behind the trade, before we get to the results:

TRADE REASONING AND RESULTS
The idea is to own the straddle with a longer expiration and sell the straddle with the closer expiration to benefit from the time decay in the shorter-term options. It’s a fine cut to make this work, but this trade does not take earnings risk, does not take stock direction risk and takes very little volatility risk.

Now, here are the results of this trade in Alibaba Group Holding Limited over the last two-years:

BABA: Long & Short Straddle
% Wins: 100%
Wins:
7
Losses:
0
% Return:  153.9% 

Click here to see this back-test live

 

While the set-up took a while to describe, the results are easy. We see a 153.9% return over the last two-years, which was 7 earnings cycles. This option trade won 7 times and lost 0 times.

Even further, each period of this trade is just six-days, so that 153.9% return is actually just 7 weeks of trading, and if we annualize that, it makes for a 1,337% return.

WHAT HAPPENED
Betting on a bull market to continue or relying on picking the right time to change sentiment can be very tricky. But the most advanced option trades side step those potential pitfalls by arranging an option trade that doesn’t take any stock direction risk, earnings risk and even limited volatility risk.

 

 

Published:2017-07-01

PREFACE
There is a powerful pattern of optimism and momentum in Apple Inc (NASDAQ:AAPL) stock right before of earnings, and we can capture that pattern by looking at returns in the option market. The strategy won’t work forever, but for now it is a momentum play that has not only returned 185% annualized returns, but has also shown a high win-rate of 67%.

PREMISE
The premise is simple — one of the least recognized but most important phenomena surrounding this bull market is the amount of optimism, or upward momentum, that sets in the two-weeks before an earnings announcement.

That is, totally irrespective of whether the stocks have a history of beating earnings, in the two-weeks before of earnings, several of them tend to rally abruptly into the event. There has been a way to profit from this pattern without taking any actual earnings risk — and it is very powerful in Apple Inc.

The Options Optimism Trade Before Earnings in Apple Inc
Let’s look at the results of buying a monthly call option in Apple Inc two-weeks before earnings and selling the call before the earnings announcement.

Here’s the set-up in great clarity; again, note that the trade closes before earnings, so this trade does not make a bet on the earnings result.

 

Now, unlike many of our other set-ups, this is in fact a straight down the middle bullish bet — this absolutely takes on directional stock risk, so let’s be conscious of that before we see the results, because they are mind bending.

Here are the results over the last three-years in Apple Inc:

 

We see a 85.1% return, testing this over the last 12 earnings dates in Apple Inc. That’s a total of just 168 days (14 days for each earnings date, over 12 earnings dates). That’s a annualized rate of 185%. That’s the power of following the trend of optimism into earnings — and never even worrying about the actual earnings result.

We can also see that this strategy hasn’t been a winner all the time, rather it has won 8 times and lost 4 times, for a 67% win-rate and again, that 85.1% return in less than six-full months of trading.

Checking More Time Periods in Apple
Now we can look at just the last year as well:

 

We’re now looking at 26.7% returns, on 3 winning trades and 1 losing trades. It’s worth noting again that we are only talking about two-weeks of trading for each earnings release, so this is 26.7% in just 8-weeks of total trading which annualizes to 174%.

NOW WHAT?
This is it. This is how people profit from the option market. But Apple is just one example — Alphabet (GOOGL) and Facebook (FB) are even more remarkable.

This is also just one strategy – we cover in depth pre and post earnings option trading at CML, from directional bets to non-directional. The results are staggering. We also cover non earnings trades — the ‘always avoid earnings’ set-ups.


 

Published:2017-06-29

PREFACE
There is an advanced option trade in Facebook Inc (NASDAQ:FB) ahead of earnings that takes no stock direction risk, carries a tight stop loss and reduces even the volatility risk which as won 11 of the last 12 pre-earnings cycles and returned more than 320% in annualized returns over the last three-years.

This is it — this is how people profit from the option market. Identifying strategies that are tightly risk controlled, take no stock direction risk and no earnings risk. Strategies that are immune from a bull or bear market.

TRADE TIMING
This is for the advanced option trader, just note that this has a few steps to it. First we start with the timing:

We want to look at a very short window, specifically opening a trade six-days before an earnings announcement and closing it the day before. Here it is plainly:

 

So, to be clear — this trade does not take on the risk of earnings, it closes before earnings.

TRADE SET-UP
With the timing set, we now construct the trade with these rules:

* Buy the at-the-money straddle with a 30-day expiration (or closest to it)
* Sell an at-the-money straddle with a 7-day expiration (or closest to it)
* Both of these straddles have expirations after earnings.
* Use a 25% stop loss so if the trade goes bad, we protect against any really large losses

Here’s how this looks, plainly:

 

And here is the reasoning behind the trade, before we get to the results:

TRADE REASONING AND RESULTS
The idea is to own the straddle with a longer expiration and sell the straddle with the closer expiration to benefit from the time decay in the shorter-term options. It’s a fine cut to try to make this work, but this trade does not take earnings risk, does not take stock direction risk and take very little volatility risk.

Now, here are the results of this trade in Facebook Inc over the last three-years:

FB: Long & Short Straddle
% Wins: 91.7%
Wins:
11
Losses:
1
% Return:  80.5% 

 

While the set-up took a while to describe, the results are easy. We see an 80.5% return over the last three-years, which was 12 earnings cycles. This option trade won 11 times and lost just 1 time. Even further, each period of this trade is just six-days, so that 80.5% return is actually just 12 weeks of trading, and if we annualize that, it makes for more than a 320% return.

Now we can look at the results over the last year:

FB: Long & Short Straddle
% Wins: 100%
Wins:
4
Losses:
0
% Return:  105% 

 

The trade has returned 105%, and won all four times it was triggered. It bears repeating, there is a 25% stop loss on this trade, there is no stock direction risk, there is no earnings risk and there is very little implied volatility (vega) risk.

That’s 40.1%, winning both of the last two pre-earnings trades.

WHAT HAPPENED
For the expert option trader, or the option trader that wants to take the next step in the evolution of trading, this is it. This is how people profit from the option market.

 

Published: 2017-06-28

This article can be seen in a video or as a full written article below the video.

PREFACE
Trading options in Fabrinet (NYSE:FN) using a short window before earnings are released has been a staggering winner over the last several years.

This is it — this is how people profit from the option market. Identifying strategies that are tightly risk controlled, take no stock direction risk and no earnings risk. Strategies that are immune from a bull or bear market.

STORY
Everyone knows that the day of an earnings announcement is a risky event for a stock. But the question every option trader, whether professional or amateur, has long asked is if there is a way to profit from this known implied volatility rise. It turns out, that over the long-run, for stocks with certain tendencies, the answer is actually, yes.

Yes, there is a systematic way to trade this repeating phenomenon, without making a bet on earnings or stock direction.

 

THE SET UP
What a trader wants to do is to see the results of buying an at the money straddle a couple of weeks before earnings, and then sell that straddle just before earnings. Here is the setup:

 

We are testing opening the position 14 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 at-the-money straddle:

RETURNS
If we did this long at-the-money straddle in Fabrinet (NYSE:FN) over the last three-years but only held it before earnings we get these results:

 

That’s a 162% return over the last three-years, with 9 winning trades and 3 losing trades. But, let’s take a step toward risk reduction before we move forward.

While we are looking at this same trade, let’s also set a rule that if at any point in the two-week period the straddle loses 25% of its value, we just close it and wait for the next pre-earnings cycle. While we’re at it, we will do the same with the upside — that is, if at any time during the two-weeks the straddle goes up 25%, we take the profits and close the trade.

For clarity, this is what we test:

 

And now we can see the results over the same three-year period:

 

While we are taking 75% less risk, we are seeing about the same results — we will continue down this risk adjusted path for the rest of this dossier.

Digging Deeper
Now we can see the results over the last two-years:

 

That’s a 126% return and 7 winning trades with 1 losing trade. Remember, this trade takes no stock direction risk and no earnings risk — this is completely agnostic to a bull or bear market.

Even further, that 126% actually came on just 16 weeks of trading (2-weeks per earnings cycle, 8 earnings cycles), which is over 400% annualized returns.

Now we look at the last year:

 

We see a 65.2% percent return on 3 winning trade and 1 losing trade.

Finally, we can look at the last six-months:

 

That’s 40.1%, winning both of the last two pre-earnings trades.

WHAT HAPPENED
This is it — this is how people profit from the option market. Identifying strategies that are tightly risk controlled, take no stock direction bets or earnings risk.

 

Published: 2017-06-26
Lede
This is a continuation of our discussion on Alphabet Inc (NASDAQ:GOOGL).

There is a powerful pattern in Facebook(FB) stock ahead of earnings that has meant a wonderful return in the option market. The strategy won’t work forever, but for now it appears to be a gigantic momentum play.

Preface
As we discussed with Alphabet Inc, one of the least recognized yet most important phenomena surrounding this market run by the mega technology stocks is the amount of optimism that sets in the two weeks before an earnings announcement.

That is, totally irrespective of whether the stocks have a history of beating earnings, in the two-weeks before of earnings, several of them tend to rally abruptly into the event. There has been a way to profit from this pattern without taking any actual earnings risk — and it is very powerful in Facebook Inc (NASDAQ:FB).

The Trade Before Earnings
Let’s look at buying a monthly call option in Facebook Inc two-weeks before earnings and selling the call before the earnings announcement.

Here’s the set-up in great clarity; again, note that the trade closes before earnings, so this trade does not make a bet on the result of the earnings result.

 

Now, unlike many of our other set-ups, this is in fact a straight down the middle bullish bet — this absolutely takes on directional stock risk, so let’s be conscious of that before we see the results, because they are mind bending.

Here are the results over the last two-years in Alphabet Inc:

 

The trade has won 6 of the last 8 earnings pre-earnings cycles — so this isn’t some silver bullet (6 wins, 2 losses). But, the trade has won 75% of the time, and the return has been a staggering 670%.

The fascinating part here is that each winning trade averaged more twice as much as the losing trades, or in English, this trades wins 3 times more often it loses and the wins are twice as large as the losses, and that’s how you find a trade with a 670% return.

Note on Risk Reduction
As a point of note, when we run this back-test using a limit gain of 30%, or in English, we close the position if it is ever up 30%, we avoid one of the losses, and this turns into a strategy that has won 7 of the last 8 earnings cycles:

 

We note here that the Alphabet Inc (NASDAQ:GOOGL) long call ahead of earnings also won 7 of the last 8 times and the losing quarter for GOOGL was not the same losing quarter for FB, so if these two were used together as a portfolio of pre-earnings calls, the combined strategy would have won all 16 times (eight quarters each).

Checking More Time Periods

Now we can look at just the last year as well (using no stops or limits):

 

We’re now looking at 324% returns on 4 winning trades and 0 losing trades. It’s worth noting again that we are only talking about two-weeks of trading for each earnings release, so this 324% in just 8-weeks of total trading.

For completeness, we include the results over the two most recent earnings events (6-months).

 

That’s 294% on 4-weeks of trading without once taking the risk of an actual earnings release.

WHAT HAPPENED
Bull markets have personalities and the personality of this bull is mega cap tech heavy and full of optimism before earnings — irrespective of the actual earnings result.

 

 

Date Published: 2017-06-23
Lede

There is an unbelievable pattern in Alphabet Inc (NASDAQ:GOOGL) stock ahead of earnings that has meant a wonderful return in the option market.

Preface
One of the least recognized yet most important phenomena surrounding this market run by the mega technology stocks is the amount of optimism that sets in the two weeks before an earnings announcement.

That is, totally irrespective of whether the stocks have a history of beating earnings, in the two-weeks before of earnings, several of them tend to rally abruptly into the event. There has been a way to profit from this pattern without taking any actual earnings risk — and it is simply staggering in Alphabet Inc (NASDAQ:GOOGL).

This is how people profit from the option market — it’s attention to detail rather than hope.

The Trade Before Earnings
Let’s look at a simple idea — buying a monthly call option in Alphabet Inc two-weeks before earnings and selling the call before the earnings announcement.

Here’s the set-up in great clarity; again, note that the trade closes before earnings, so this trade does not make a bet on the result of the earnings result.

 

Now, unlike many of our other set-ups, this is in fact a straight down the middle bullish bet — this absolutely takes on directional stock risk, so let’s be conscious of that before we see the results, because they are mind bending.

Here are the results over the last two-years in Alphabet Inc:

 

I know it seems absurd, but the trade has won 7 of the last 8 earnings pre-earnings cycles, for an 895% return.

We can look at the last year as well:

 

We’re now looking at 377% returns on 4 winning trades and 0 losing trades. It’s worth noting again that we are only talking about two-weeks of trading for each earnings release, so this 377% in just 8-weeks of total trading.

For completeness, we include the results over the two most recent earnings events (6-months).

 

That’s 209% on 4-weeks of trading without once taking the risk of an actual earnings release.

THE STOCK CHART
We can look at Alphabet Inc’s stock chart to see what’s happening — that is, to see the optimism (The blue “E” icons represent earnings). Note that the yellow arrows show the stock rise ahead of earnings, and we even box the times that the post earnings move was poor:

 

What is so fascinating about this chart is that the stock does not necessarily follow through after earnings. We have boxed the times when GOOGL stock actually tanked after earnings — but it has not upset the pattern of optimism for the next pre-earnings move.

If you’re wondering if this works for other mega tech names, the answer is yes. We will cover those for subscribers in the coming days and combining them, that is, taking a position in more than one, alleviates the risk of a “coin flip” miss. That’s the approach we want to take.

Even further, all of the results we looked at were using a 50% stop loss — that means if the calls that were purchased ever saw losses, we just closed the potion out and moved on.

WHAT HAPPENED
This is how people profit from the option market — it’s preparation, not luck.

 

Date Published: 2017-06-21

LEDE
Red Hat Inc (NYSE:RHT) just beat earnings and the stock is ripping to new all-time highs, but the real opportunity with options wasn’t earnings — it’s right after earnings.

The Trade After Earnings
Selling a put spread every month in a stock that is rising, in hindsight, obviously looks like a great idea. But, there is a lot of risk in that trade, namely, the risk of an abrupt stock drop and a market sell-off that takes all stocks with it. So, we want to reduce the risk while not affecting the returns.

One of our go to trade set-ups starts by asking the question if trading every month is worth it — is it profitable — is it worth the risk? There’s an action plan that measures this exactly, and the results are powerful not just for Red Hat Inc, but for Apple Inc (NASDAQ:AAPL), Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOGL) as well.

Let’s test the idea of selling a put spread only in the month after earnings. Here’s what we mean:

 

Our idea here is that after earnings are reported, and after the stock does all of its gymnastics, up or down, that two-days following the earnings move and for the next month, the stock is then in a quiet period.

If it gapped down — that gap is over. If it beat earnings, the downside move is already likely muted. Here is the set-up:

 

More explicitly, the rules are:

Rules
* Open short put spread 2-days after earnings.
* Close short put spread 29-days later.
* Use the option that is closest to but greater than 40-days away from expiration.

And here are the results of implementing this much finer strategy:

 

We see a 29.4% winner that only traded the month following earnings and took no risk at all other times. The trade has won 7 of the last 8 times, or an 87.5% win-rate.

Here is how the strategy has done over the last year:

 

It turns out the return is really coming from a streak of wins in the last year. We see a 47.5% return, winning each of the last four earning cycles. That 47.5% return is based on just 4-months of trading, so it’s more than 160% in annualized returns.

Here’s what we see over the last six-months:

 

Now we see a 28.9 return over the last two earnings cycles, winning both times.

As an aside, this logic of finding the month of lowest risk to sell put spreads also worked remarkably well and remarkably similarly across the board in Apple Inc, Facebook Inc and Alphabet Inc.

 

WHAT HAPPENED
This is it. This is just one of the ways people profit from the option market — optimize returns and reduce risk.

 

Date Published:2017-06-19
LEDE
Twitter Inc (NYSE:TWTR) has a pattern of missing earnings and a stock drop after the fact. But, the incredible phenomenon comes right before earnings — no matter how many times Twitter disappoints, optimism tends to build just before the earnings release, and that is a trade-able phenomenon.

This is how people profit from the option market — it’s attention to detail rather than hope.

The Trade Before Earnings
Selling a put spread is simply a bet that a stock “won’t go down very much.” Doing so in Twitter has been a disaster — as the stock has fallen so has a short put spread trader been eviscerated.

But we don’t care about the stock movements on whole, what we care about is a repeatable pattern and for Twitter that has meant optimism, or least a lack of pessimism, ahead of earnings.

THE TRADE
What we want to test is selling at out-of-the-money put spread in Twitter two-weeks before earnings which expires before earnings. We don’t want to make an earnings bet, we simply want to ride the immovable optimism in the stock right before earnings. Here is the set-up:

 

And here are the results, side-by-side with selling a put spread every two-weeks.

 

We see a 59% losing trade turn into a 72.7% winning trade and we also see the win-rate go from 64% to 83%. Even further, the left-hand side required trading every two-weeks for three-full years, whereas this pre-earnings trade only happened 12 times (one for each earning release) for a total of 24-weeks of trading.

Consistent
This “optimism,” or really, “lack of pessimism,” in Twitter stock right before earnings has been a consistent pattern. Here are the results over the last two-years:

 

We’re now looking at nearly 29% returns on 6 winning trades and 2 losing trades. It’s worth noting again that we are only talking about two-weeks of trading for each earnings release, so this 29% in just 24-weeks.

For completeness, we include the results over the two most recent earnings events (6-months).

 

That’s 25% on 4-weeks of trading or a whopping 325% annualized return without once taking the risk of an actual earnings release.

WHAT HAPPENED
This is how people profit from the option market — it’s preparation, not luck. It’s attention to detail rather than hope. To see how to do this for any stock and for any strategy, including covered calls, with just the click of a few buttons, we welcome you to watch this quick demonstration video:


 

Date Published: 2017-06-15
LEDE
Microsoft Corporation (NASDAQ:MSFT) is the long forgotten mega cap while media darlings Apple Inc, Facebook Inc, and Alphabet Inc garner all the headlines. But the lack of attention hasn’t removed the opportunity in options, especially after earnings.

The difference between professional traders and non-professionals is usually access to information and mindset. We can address both with this analysis on Microsoft Corporation where we look at an option trade right after earnings that has been a winner without a loss for an entire year, and has been a loser once in the last three-years.

The Trade After Earnings
Selling a put spread every month in a stock that is rising, in hindsight, obviously looks like a great idea. But, there is a lot of risk in that trade, namely, the risk of an abrupt stock drop.

It’s a fair question to ask if trading every month is worth it — is it profitable — is it worth the risk? There’s an action plan that measures this exactly, and the results are powerful not just for Microsoft, but for Apple Inc (NASDAQ:AAPL), Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOGL) as well.

Let’s test the idea of selling a put spread only in the month after earnings. Here’s what we mean:

 

Our idea here is that after earnings are reported, and after the stock does all of its gymnastics, up or down, that two-days following the earnings move and for the next month, the stock is then in a quiet period.

If it gapped down — that gap is over. If it beat earnings, the downside move is already likely muted. Here is the set-up:

 

More explicitly, the rules are:

Rules
* Open short put spread 2-days after earnings.
* Close short put spread 29-days later.
* Use the option that is closest to but greater than 30-days away from expiration.

And here are the results of implementing this much finer strategy:

 

It’s almost too good to be true — a 71.6% return on 12 trades, where 11 were winners. We do note that the one loser came in February 2016 where the test sold a 53/50 strike put spread at $0.66 and ended up buying it back for $1.53 — so an $0.87 loss on an original $0.66 credit.

All the other trades over the last three-years were winners.

Here’s what we see over the last year:

 

Now we see a 42.2% return over the last four earnings cycles, but the beauty of this approach has not just been superior returns, it doesn’t tie up capital for months that aren’t profitable. Since this was just four-months of trading, that’s over 160% annualized returns.

Finally, here are the last two earnings cycles (six-months):

 

Remarkably consistent — with a 22.1% over six-months and 42.2% over the last year.

As an aside, this logic of finding the month of lowest risk to sell put spreads also worked remarkably well and remarkably similarly across the board in Apple Inc, Facebook Inc and Alphabet Inc.

 

WHAT HAPPENED
This is it — this is how people profit from the option market — it’s access to information.

 

 

Date Published: 2017-06-09
PREFACE
The market has a new-found volatility and that means the trusted long-only strategies may start to fail more often.

But, for the investor that is interested in turning a profit with some homework, this new found volatility does mark an opportunity for several stocks with options, and in this case study we look at Workday Inc (NYSE:WDAY) in depth, and then Google and Amazon to reinforce the learning.

This is an evergreen approach that can be used, when appropriate — don’t get too distracted by a case study.

STORY
There is always a way to trade options that benefits from market volatility — that’s not the issue — the issue is how to avoid making the investment when the market is not volatile.

Yes, this is how the hedge funds and algos make the top 0.1% richer at the expense of every other individual trader. Now it’s time to do it ourselves.

JOINING THE ELITE
Simply buying near-the-money options and selling further out-of-the-money options is a trade that looks for market volatility. It has a fancy name, “Iron Condor.” The elite funds hope that just the name will scare you off.

If we did it in Workday Inc, it would have been a disaster. Here are the results over the last 3-years:

 

Yep — a 50% loss over three-years while the stock was up 30%.

But there is a much smarter way to approach this and it’s easiest seen with a stock chart. What we’re looking at below is a 2-year stock chart for Workday Inc, with the earnings dates highlighted by the blue “E” icon, and circled.

 

What we can see, totally irrespective of the earnings move, is that the month before earnings, the stock tends to trade with volatility.

We can see that with the yellow arrows drawn in the month before each earnings announcement. Take some time to inspect the chart above — this is where your knowledge base builds. It’s fast and easy, buy it takes a little care.

Now, we don’t care if the stock goes up or down, what we care about is that the stock does something — that’s why this can act as a hedge to a long portfolio. Watch what happens to our iron condor option strategy when we only trade the month before earnings.

Here’s the set-up, to be perfectly clear what we’re testing:

 

And here are the results:

 

That 50% losing trade, when we isolate it to just the month before earnings, now returned 92.8%. Yes, that is a total and utter reversal of the original approach and for the record, the stock itself is only up 29% in those three-years.

The first attempt we checked is what everyone else is doing. The second approach is what the top 0.1% are doing.

GOOGLE AND AMAZON
We have more to discuss with this approach, but to motivate this beyond just Workday, here are the 3-year results for Alphabet Inc (GOOGL) and Amazon.com Inc
(AMZN).

Alphabet Inc (NASDAQ:GOOGL)

 

Amazon.com Inc (NASDAQ:AMZN)

 

Now, onward…

CONSISTENCY
Here is how this pre-earnings iron condor has done over the last two-years in Workday:

 

That’s an 82.4% return, with 5 wining trades and 3 losing trades. When we can see a hedge turn into a profitable investment, that is an unusual and ideal undertaking.

For completeness, here are the results over the last six-months, which is really just two earnings announcements, one-month before each, for a total of two-months of trading:

 

Now we see a 42% return in just two-months of trading, with the last two pre-earnings trades both winning.

WHAT HAPPENED
You have now seen the realities of option trading. The wealthiest and most successful funds and algos get ahead by using intelligence like this. If you have the desire to do it as well, then you too can find the patterns that drive profits and make option trading less about luck, and more about knowledge.

And, if weird names like “iron condors” feel a bit out of your comfort zone, that’s OK, this type of intelligence even works for covered calls and much less complex ideas.

 

Date Published:2017-06-07
LEDE
Look, this could feel a little uncomfortable, not in that it’s complex, it’s actually quite easy and fun, but it is the difference between professional traders and non-professionals. And it’s just not easy to read how a simple information gap can be the difference between the top 0.1% and everyone else, sometimes. Here we go.

There is a way to trade Applied Optoelectronics Inc (NASDAQ:AAOI) options right after earnings that has been a winner without a loss for an entire year, and further has returned over 170% annualized returns in that time frame.

The Trade After Earnings
Selling a put spread in a stock that is rising, in hindsight, obviously looks like a great idea. Here is the stock price chart for Applied Optoelectronics Inc over the last two-years:

 

We can see the stock that is ripping, but we have also labeled the earnings announcements with the blue “E” icon, and noted the two poor earnings results in yellow. Remember those two circled dates.

If we had blindly sold an out-of-the-money put spread every month in Applied Optoelectronics over the last three-years, the results were actually not very impressive.

 

We can see 30.2% return, while taking on a lot of risk. The next logical step is to try this same approach but simply avoid (skip) earnings days. Here are those results:

 

We can see a nice improvement, going from a 30% return up to 43.8% and taking a lot less risk.

But there’s more going on here. It’s a fair question to ask if trading every month is worth it — is it profitable — is it worth the risk? There’s an action plan that measures this exactly, and the results are simply stunning.

Let’s test this idea:

 

In English, let’s see what would have happened if we sold this same put spread, but rather than trading every month, we simply traded the month right after earnings.

 

More explicitly, the rules are:

Rules
* Open short put spread 2-days after earnings.
* Close short put spread 29-days later.
* Use the option that is closest to but greater than 30-days away from expiration.

And here are the results of implementing this much finer strategy:

 

All of a sudden, by removing the risk of earnings, and then removing the risk of 2 out of the other 3 months every quarter, we find option returns that have spiked to 82.4%. But of course, we can’t just test an idea because it works — there must be logic to what we’re doing.

And yes, there is sound logic to this approach to option trading.

The Logic
Our idea here is that after earnings are reported, and after the stock does all of its gymnastics, up or down, that two-days following the earnings move and for the next month, the stock is then in a quiet period.

If it gapped down — that gap is over. If it beat earnings, the downside move is already likely muted.

If you recall that stock chart from the top, there were a couple of times that Applied Optoelectronics missed on earnings and fell hard. here is a zoomed in image of the earnings reported on 5-9-2016:

 

The stock gapped down hard, losing more than 17% in a single day. But here’s where our logic comes into play. If we’re right, after two days of price movement, the stock should find a sort of equilibrium, and stop dancing around.

We can see this exact phenomenon. The earnings date was May 9th, the trade entry date was 2-days later, May 11th. From that entry point to one month later when the trade closes, the stock rose.

Yep, even after a terrible earnings release, once the bad news had its chance to play out, the stock was fine. And since a short put spread is simply a bet that the stock “won’t go down a lot,” this set-up has played perfectly.

Here is how the strategy has done over the two-years:

 

We see a 56.8% return over eight earnings cycles. But remember, since this trade is only live for one-month a quarter, that 56.8% return was actually just 8-months of trading, not two-years.

Here’s what we see over the last year:

 

Now we see a 46.4% return over the last four earnings cycles, but the beauty of this approach has not just been superior returns, it doesn’t tie up capital for months that aren’t profitable. Since this was just four-months of trading, that’s over 170% annualized returns.

WHAT HAPPENED
This is it. This is how people find their edge trading options.


 

Date Published: 2017-06-05

This article can be watched as a video, below, or read as a dossier below this video:

PREFACE
What we’re going to look at could feel uncomfortable because it’s a glaring example of how the top 0.1% have been dissecting retail traders for decades.

A covered call is a common option strategies for owners of a stock, but the fact that it is ubiquitous has also meant a lack of rigor. With relative ease, we can go much further — to identify the risks we want to take, and those that we don’t, to optimize our results. Tesla Inc (NASDAQ:TSLA) is a great example.

STORY
Before we get into a real action strategy, we can look at how selling a covered call in Tesla Inc has done over the last two-years, trading monthly options, and how it has failed.

 

We see a weak 4.8% return and of the 27 times this trade was put on, it only was a winner 15-times, or 55.6% of the time.

Now we take the first step (of two), to dig out the risk and optimize the returns. Earnings is one of the riskiest events for a stock, so let’s see what happens if we always avoid earnings but do the same strategy — a covered call every month for two-years.

What we want to impress upon you is how easy this is with the right tools. Just tap the appropriate settings.

 

And here are the results:

 

We can see the returns have nearly tripled to 13.1% and the win-rate is now up to 68%. But, if we’re fair with our analysis, this isn’t particularly exciting either. So what next?

Are there better months to sell a covered call than other months?

 

It turns out that the answer for Tesla Inc is, yes.

BETTER
We can test a simple idea: As the earnings date approaches for Tesla Inc, we can try a hypothesis that the stock will neither “go up a lot” nor will “go down a lot” in just that month right before earnings.

If this is true, then selling a covered call should work very well. Here is how we set it up:

Rules
* Sell a covered call 29 days before earnings
* Close the position one day before earnings

We note that we are not taking earnings risk, but are closing the covered call before earnings. It’s easy to see in the settings:

 

And now, here the results over the last year:

 

The return has jumped to 36.9% and the win-rate has jumped to 75%. In the last two-years this has worked six of the last eight times.

We can also see how this has done over the last year and six-months:

 

That 15.7% return in the last year came from just 4-months of trading, which is in fact over 60% annualized returns.

WHAT HAPPENED
For those that are long Tesla Inc stock, a 36.9% return from just the month before earnings in the last two-years is a serious find. So too is a 15.7% return in just 4-months of trading over the last year.

 

Date Published: 2017-06-02
PREFACE
What we’re going to look at could feel uncomfortable because it’s a glaring example of how the top 0.1% have been dissecting retail traders for decades.

A risk averse approach to covered calls in Facebook Inc has not only been a winner for an entire straight, but it has returned upward of 70% annualized returns.

STORY
Everyone knows that the day of an earnings announcement is a risky event for a stock. Before we get into a real action strategy, we can look at how selling a covered call in Facebook Inc has done over the last year if we always avoided earnings.

What we want to impress upon you is how easy this is with the right tools. Just tap the appropriate settings.

 

And here are the results:

 

At first blush this looks like a reasonable approach. The long stock position combined with the covered call returned 27.9% in a year, trading every month and avoiding earnings. But there’s a question that we must ask if we want to be exceptional option traders:

Are there better months to sell a covered call than other months?

 

It turns out that the answer for Facebook Inc is, yes.

BETTER
Facebook is one of the five largest companies in the world forever tied to its other large cap rivals Apple, Alphabet, Amazon and Microsoft. As the earnings date approaches for Facebook Inc, we can test the idea that it will neither “go up a lot” nor will “go down a lot” in that month right before earnings.

That is to say, with so much attention on these mega caps, the month before earnings can be relatively tame as all the anticpation builds for the single day of earnings.

If this is true, then selling a covered call should work very well. Here is how we set it up:

Rules
* Sell a covered call 29 days before earnings
* Close the position one day before earnings

We note that we are not taking earnings risk, but are closing the covered call before earnings. It’s easy to see in the settings:

 

And now, here the results over the last year:

 

We see a 17.7% return but note that this was a one-month trade each time earnings came around, so that 17.7% took just four-months of trading which is more than 70% returns annualized. We can also see that in the last year, this strategy worked all four times.

In the last two-years this has worked six of the last eight times.

WHAT HAPPENED
We just took perhaps the most common option strategy, did a little analysis and found a process that created out-sized returns while only trading one-month a quarter. For those that are long Facebook Inc stock, a 17.7% return from just the month before earnings in the last year is a serious find.

This is how people profit from the option market — it’s preparation, not luck. There are a lot of companies that fit this strategy, and there’s more — don’t forget that month after earnings.

 

Date Published: 2017-06-01
Written by Ophir Gottlieb

LEDE
There is a way to trade Broadcom Ltd (NASDAQ:AVGO) options right after earnings that has been a winner more than 85% of the time over the last two-years and has returned almost 120% annualized returns over the last six-months.

The Trade After Earnings
The earning moves is the headline grabber for stocks, but for Broadcom Ltd, irrespective of whether the earnings move was up or down, if we waited two-days after the market move from earnings, and then sold an out of the money put spread, the results were very strong and risk was well defined.

We can examine this, objectively, with a custom option back-test. Here is our earnings set-up:

 

Rules

* Open short put spread 2-days after earnings.
* Close short put spread 29-days later.
* Use the option that is closest to but greater than 30-days away from expiration.

Here is the timing of the trade in an image:

And here are the results of implementing this strategy:

 

Focusing in just the month after earnings, we see a 35.3% return over a total of 7 earnings releases. We also see that this idea won 6 times and lost 1 times. Since we are covering just seven earnings releases, and each trade is just one-month in length, that 35.3% is over just a seven-month period, which comes out to 60% if annualized.

This is not a trade that ties up capital for very long.

The Logic
Our idea here is that after earnings are reported, and after the stock does all of its gymnastics, up or down, that two-days following the earnings move and for the next month, the stock is then in a quiet period.

If it gapped down — that gap is over. If it beat earnings, the downside move is already likely muted. Here’s how this strategy has done over the last year:

 

The “single-month” approach returned 20.2% over the last four earnings cycles — that’s just four months of trading.

Finally, here are the results over the last six-months:

 

That’s about 20% over just two earnings cycles, with both trades turning out to be winners.

If we consider that the 19.8% return was just over two-months (two earnings cycles, holding the short-put spread for one-month each), the return is actually just below 120% annualized.

WHAT HAPPENED
This is how people profit from the option market — it’s preparation, not luck.

 

 

Date Published: 2017-05-30
LEDE
If we leverage the idea that the stock “won’t go down very much” but add two strict risk protections in case it does, while also avoiding earnings, we find the one risk protected option trade right after earnings that has been a consistent winner, has returned over 85% annualized returns in the last six-months and has been a bastion of safety over the last 3-years.

The Trade After Earnings
While most of the focus in the market is on the earnings move for a stock, for JPMorgan Chase & Co, irrespective of whether the earnings move was up or down, if we waited two-days after the market move from earnings, and then sold an out of the money put spread, the results were very strong and risk was well defined.

Even further, if we added a stop loss to the short-put spread to limit the losses even more, we find a fairly conservative option trade with strong returns.

We can examine this, objectively, with a custom option back-test. Here is our earnings set-up:

 

And then we add a stop loss:

 

Rules
* Open short put spread 2 day after earnings.
* Close short put spread 29 days later.
* Use the option that is closest to but greater than 30-days away from expiration.
* Use a stop loss at 50% to reduce risk.

Here is the timing of the trade in an image:

 

And here are the results of implementing this strategy:

 

Focusing in just the month after earnings, we see a 56.2% return over a total of 11 earnings releases. We also see that this idea won 8 times and lost 3 times.

The Logic
Our idea here is that after earnings are reported, and after the stock does all of its gymnastics, up or down, that two-days following the earnings move and for the next month, the stock is then in a quiet period.

If it gapped down — that gap is over. If it beat earnings, the downside move is already likely muted. Here’s how this strategy has done over the last two-years:

 

The “single-month” approach returned 26% over the last seven earnings cycles — that’s just seven months of trading.

Finally, here are the results over the last 1-year:

 

That’s about 20% over three earnings cycles, with all three turning out to be winners. And for completeness, here are the results over the last six-months.

 

If we consider that the 14.6% return was just over two-months (two earnings cycles, holding the short-put spread with a stop loss for one-month each), that 14.6% in two-months is 87.6% annualized.

Date Published: 2017-05-25
This article can be seen as a video or in the written word. The video is presented first and the article below it.

LEDE
Ulta Beauty Inc (NASDAQ:ULTA) has been a top performer in the S&P 500, proving quite definitively that a retailer can find success, even in the world of Amazon.com.

But, while all of the focus surrounds the earnings releases, one options trade in Ulta Inc trade after earnings has been a consistent winner, has a much shorter holding period, takes no earnings risk, little stock direction risk all while returning over 90% annualized returns.

The Trade After Earnings
While most of the focus is on the actual earnings move for a stock, that’s the distraction when it comes to the option market. For Ulta Inc, irrespective of whether the earnings move was up or down, if we waited two-days after the stock move from earnings, and then sold an out of the money put spread, the results were very strong.

We can examine this, objectively, with a custom option back-test. Here is our earnings set-up:

 

Rules
* Open short put spread 2 day after earnings
* Close short put spread 29 days later
* Use the option that is closest to but greater than 30-days away from expiration

While there is one additional step we need to make to contain risk, here are the first results:

 

Focusing in just the month after earnings, we see a 38.6% return over a total of 12 earnings releases. We also see that this idea won 11 times and lost 1 time. But, there is a further step we can take.

Our idea here is that after earnings are reported, and after the stock does all of its gymnastics, up or down, that two following the earnings move and for the next month, the stock is then in a quiet period. If that’s the case, one approach to protect the downside, is to put in a stop loss. We do that, like this:

 

And here are the results now:

 

By only trading the month after earnings and putting in a stop loss, we now see 92.4% return while maintaining the 11 wins and 1 loss.

The Logic
The logic behind this trade follows a narrative that even after a bad earnings release, if we wait two days after, we find the stock at a point of equilibrium.

If it gapped down — that gap is over. If it beat earnings, the downside move is already likely muted. Here’s how this strategy has done over the last two-years:

 

The “single-month” approach returned 58.4% over the last eight earnings cycles — that’s just eight months of trading.

Finally, here are the results over the last 6-months:

 

WHAT HAPPENED
To see how to do this for any stock and for any strategy with just the click of a few buttons, check this out.

 

Published: 5-23-2017

This article can seen below in video format just below this text, or in the written word below the video. The video covers Apple and Goldman Sachs in addition to Visa, while the article covers only Visa.

LEDE
While Visa Inc (NYSE:V) just broke another all-time high in stock price, one option trade after earnings has been a consistent winner, has a much shorter holding period, and has vastly outperformed the stock. It takes no earnings risk, little stock direction risk, and over the last year has never lost while returning over 100% annualized returns.

The Trade After Earnings
While most of the focus is on the actual earnings move for a stock, that’s the distraction when it comes to the option market. For Visa Inc, irrespective of whether the earnings move was up or down, if we waited two-days after the stock move from earnings, and then sold an at the money put spread, the results were very strong.

We can examine this, objectively, with a custom option back-test. Here is our earnings set-up:

 

Rules
* Open short put spread 2 day after earnings
* Close short put spread 29 days later
* Use the option that is closest to but greater than 30-days away from expiration

Here are the results over the last year — while also comparing this strategy to the less refined idea of just selling the put spread every month, while also avoiding earnings.

 

Focusing in just the month after earnings, we see a 79.1% return over a total of 12 earnings releases. But, doing this strategy all year returned just 57.7%. For each approach, no earnings risk was taken — this is not a coin flip over earnings.

But there’s more here. For clarity, this is how the two strategies differ:

 

By only trading the month after earnings, we are looking at a strategy that only had open positions for 12 full months (one-month per earnings period, 4 earnings releases per year). The other approach did in fact take full 3-years to realize and that means it tied up the margin for much longer.

The Logic
The logic behind this trade follows a narrative that even after a bad earnings release, if we wait two days after, we find the stock at a point of equilibrium.

If it gapped down — that gap is over. If it beat earnings, the downside move is already likely muted. Here’s how this strategy has done over the last year, again compared side-by-side to the short put strategy that traded all months:

 

The “single-month” approach returned 35.6% over the last four earnings cycles, but since this is a total of a four-month holding period, that 35.6% is actually over 105% annualized. The approach that held during all months returned just 10.3%, and that is the annual return — it took a full year to realize.

During the last year, the stock is up 21.8%.

WHAT HAPPENED
There are patterns to stock behaviors before and after earnings and those patterns reveal opportunities in the option market, without taking the actual risk of earnings. You can find them, stock by stock, Apple, Google, Netflix and of course Visa Inc are just a handful of examples. There has been edge here with this strategy.

 

 

LEDE
While Autodesk Inc (NASDAQ:ADSK) just crushed earnings again, sending shares soaring in the after hours trade, one option trade after earnings has been a consistent winner. It takes no earnings risk, little stock direction risk and over the last year has never lost while returning over 160% annualized returns.

The Trade After the Excitement
While most of the focus is on the actual earnings move for a stock, that’s the distraction when it comes to the option market. For Autodesk Inc, irrespective of whether the earnings move was up or down, if we waited one-day after the stock move from earnings, and then sold an out of the money put spread, the results were very strong.

We can examine this, objectively, with a custom option back-test. Here is our earnings set-up:

 

Rules
* Open short put spread 1 day after earnings
* Close short put spread 29 days later
* Use the option that is closest to but greater than 30-days away from expiration

Here are the results over the last year:

 

That’s a 47.3% return, with 4 winning trades and 0 losing trades. The total holding period was less than 4 full months, meaning the annualized return was over 160%. No earnings risk was taken — this is not a coin flip over earnings.

The Logic
This strategy works beautifully in many companies where heavy stock volume follows the earnings release. The logic behind this trade follows a narrative that even after a bad earnings release, if we wait a day after, we find the stock at a point of equilibrium.

If it gapped down — that gap is over. If it beat earnings, the downside move is already likely muted. Here’s how this strategy has done over the last 6-months:

 

That’s a 21.3% return, on 2 winning trades and 0 losing trades. Since this is a total of a two-month holding period, that 21.3% is actually over 120% annualized.

If you’re curious, yes, this also produced positive returns over the last 3-years. Here are those results.

 

Now we can find some comfort in this approach where is shows 9 winning trades and just 2 losing trades over the last three-years.

WHAT HAPPENED
There are patterns to stock behaviors before and after earnings and those patterns reveal opportunities in the option market, without taking the actual risk of earnings. You can find them, stock by stock, Apple, Google, Netflix and of course Autodesk Inc are just a handful of examples. There has been edge here with this strategy.

 

Published: 2017-05-16
PREFACE
Alibaba Group Holding Ltd (NYSE:BABA) has been on tear, up 56% in the last year, but a risk managed option strategy has so outperformed the stock it’s almost unbelievable.

OPTION TRADING
Selling an out of the money put spread is an investment that wins if the underlying stock “doesn’t go down a lot.” It sounds boring, but it has been a powerful tool with Alibaba Group Holding Ltd (NYSE:BABA) — but only for the clever trader.

Here is how selling an out of the money put spread every month has done over the last three-years:

 

If that return looks low, it is. The stock has actually been up 35% in the last three-years. But this isn’t the trade the professionals make, this is the trade the amateurs make.

What we need to do is measure the impact of earnings announcements on this strategy by adjusting our settings, like this:

Once we add this change, the results are staggering. Here are the three-year results for this option trade, now:

 

We have taken an 16.9% return and seen it rise to over 100%, and all we really did was take less risk. The 105% return in three-years has nearly tripled the stock and avoided all of the risk of earnings, while simply investing in the idea that Alibaba Group Holding Ltd “won’t go down a lot.”

CONSISTENT OVER TIME
We can do this exact test over the last two-years, as well:

 

We see a 9.2% return turned into a 47.8% return, or about a 5-fold increase by taking less risk. Again, this option investment has outperformed the stock, as well.

Finally, we can look at the last year:

 

Selling an out of the money put spread but avoiding earnings has returned 116% in the last year, versus a stock rise of 56%.

WHAT HAPPENED
This is how people profit from the option market — it’s preparation, not luck.

 

How to Trade Options Before Earnings in Apple Inc (NASDAQ:AAPL)

Date Published: 2017-05-15

PREFACE
Trading options in a short window before earnings are released benefits from the rising implied volatility but avoids the risk into the actual earnings release and also avoids any kind of stock direction risk.

This approach has returned an annualized rate of 262%, and it’s the strategy that every professional option trader would rather you never hear about.

STORY
Everyone knows that the day of an earnings announcement is a risky event for a stock and therefore implied volatility tends to rise. But the real question is if there is a way to profit from this known volatility rise. It turns out, that over the long-run, for stocks with certain tendencies, the answer is actually, yes.

Yes, there is a systematic way to trade this repeating phenomenon, without making a bet on earnings or stock direction.

 

THE SET UP
What a trader wants to do is to see the results of buying an at the money straddle a few days before earnings, and then sell that straddle just before earnings. Here is the setup:

 

We are testing opening the position 6 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 at-the-money straddle:

RETURNS
If we did this long at-the-money (also called ’50-delta’) straddle in Broadcom Limited (NASDAQ:AVGO) over the last three-years but only held it before earnings we get these results:

Long At-the-Money Straddle
* Monthly Options
* Back-test length: three-years
* Open 6-days Before Earnings
* Close 1-day Before Earnings
* Holding Period: 5-Days per Earnings
Winning Trades: 7
Losing Trades: 5
Pre-Earnings Straddle Return:  52.4
Annualized Return:  262

 

We see a 52.4% return, testing this over the last 12 earnings dates in Apple Inc. That’s a total of just 55 days (5 days for each earnings date, over 12 earnings dates). That’s an annualized rate of 262%.

We can also see that this strategy hasn’t been a winner all the time, rather it has won 7 times and lost 5 times, for a 55% win-rate, but here’s the key —

While the strategy wins about half of the time, the average gain per winning trade is substantially larger than the average loss on a losing trade — we’re talking more than 4-fold:

 

WHAT HAPPENED
There is a strategy to trading options before earnings that does not take the actual risk of earnings or a stock direction bet. This is how people profit from the option market — it’s preparation, not luck.

 

How to Trade Options Before Earnings in Broadcom Limited (NASDAQ:AVGO)

Date Published: 2017-05-15

PREFACE
Trading options in a short window before earnings are released benefits from the rising implied volatility but avoids the risk into the actual earnings release and also avoids any kind of stock direction risk.

This approach has returned an annualized rate of 198%. Now that’s worth looking into.
Back-test Link

STORY
Everyone knows that the day of an earnings announcement is a risky event for a stock. This can be explicitly seen in the option market, where the implied volatility (the expected stock move) rises into the earnings event.

The question every option trader, whether professional or amateur, has long asked is if there is a way to profit from this known volatility rise. It turns out, that over the long-run, for stocks with certain tendencies like Broadcom Limited (NASDAQ:AVGO) the answer is actually, yes.

Yes, there is a systematic way to trade this repeating phenomenon, without making a bet on earnings or stock direction.

 

THE SET UP
What a trader wants to do is to see the results of buying an at the money straddle a few days before earnings, and then sell that straddle just before earnings. The goal, is two-fold: (i) to benefit from that known implied volatility rise, and (ii) to own the straddle for a very short period of time when the stock might move ‘a lot,’ but taking no earnings bets.

If either of those two phenomena occur, there’s a very good chance this wins, if neither occur, the amount risked is normally quite small. Here is the setup:

 

We are testing opening the position 6 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 at-the-money straddle:

RETURNS
If we did this long at-the-money (also called ’50-delta’) straddle in Broadcom Limited (NASDAQ:AVGO) over the last three-years but only held it before earnings we get these results:

Long At-the-Money Straddle
* Monthly Options
* Back-test length: three-years
* Open 6-days Before Earnings
* Close 1-day Before Earnings
* Holding Period: 5-Days per Earnings
Winning Trades: 5
Losing Trades: 7
Pre-Earnings Straddle Return:  17.1
Annualized Return:  102

 

We see a 17.1% return, testing this over the last 12 earnings dates in Broadcom Limited. That’s a total of just 60 days (5 days for each earnings date, over 12 earnings dates). That’s an annualized rate of 102%.

We can also see that this strategy hasn’t been a winner all the time, rather it has won 5 times and lost 7 times, but here’s the key — it wins about half of the time, but the average gain per winning trade is substantially larger than the average loss on a losing trade:

 

Consistently Successful
This idea has also been a successful approach over the last two-years:

Long At-the-Money Straddle
* Monthly Options
* Back-test length: two-years
* Open 6-days Before Earnings
* Close 1-day Before Earnings
* Holding Period: 5-Days per Earnings
Winning Trades: 4
Losing Trades: 4
Pre-Earnings Straddle Return:  22%
Annualized Return:  102

 

Now we see a 22% return, testing this over the last 8 earnings dates which is an annualized rate of 198%.

Yet again, we see a trade that wins about half the time, but the average win is much larger than the average loss:

 

WHAT HAPPENED
This is how people profit from the option market — it’s preparation, not luck.

 

PREFACE
There is a way to trade options right before earnings announcements in GoPro Inc (NASDAQ:GPRO), and really many stocks, that benefits from the rising implied volatility but avoids the risk into the actual earnings release and also avoids any kind of stock direction risk.

STORY
Everyone knows that the day of an earnings announcement is a risky event for a stock. This can be explicitly seen in the option market, where the implied volatility (the expected stock move) rises into the earnings event.

The question every option trader, whether professional or amateur, has long asked is if there is a way to profit from this known volatility rise. It turns out, that over the long-run, for stocks with certain tendencies like GoPro Inc (NASDAQ:GPRO) the answer is actually, yes.

Yes, there is a systematic way to trade this repeating phenomenon, without making a bet on earnings or stock direction.

 

THE IDEA
What a trader wants to do is to see the results of buying an at the money straddle a few days before earnings, and then sell that straddle just before earnings. The goal, is two-fold: (i) to benefit from that known implied volatility rise, and (ii) to own the straddle for a very short period of time when the stock might move ‘a lot,’ but taking no earnings bets.

Here is the setup:

 

We are testing opening the position 6 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 at-the-money straddle:

RETURNS
If we did this long at-the-money (also called ’50-delta’) straddle in GoPro Inc (NASDAQ:GPRO) over the last three-years but only held it before earnings we get these results:

Long At-the-Money Straddle
* Monthly Options
* Back-test length: three-years
* Open 6-days Before Earnings
* Close 1-day Before Earnings
* Holding Period: 5-Days per Earnings
Winning Trades: 5
Losing Trades: 8
Pre-Earnings Straddle Return:  21
Annualized Return:  118

 

(Here is the back-test link.)

We see a 21% return, testing this over the last 13 earnings dates in GoPro Inc. That’s a total of just 65 days (5 days for each earnings date, over 13 earnings dates). That’s an annualized rate of 118%.

We can also see that this strategy hasn’t been a winner all the time, rather it has won 5 times and lost 8 times, for a 38% win-rate and again, that 21% return in less than two-full months of trading.

This approach has also been a winner over the last two-years — in fact, it has been even better than the last three-years.

Long At-the-Money Straddle
* Monthly Options
* Back-test length: two-years
* Open 6-days Before Earnings
* Close 1-day Before Earnings
* Holding Period: 5-Days per Earnings
Winning Trades: 4
Losing Trades: 4
Pre-Earnings Straddle Return:  43
Annualized Return:  326

 

MORE TO IT THAN MEETS THE EYE
While this strategy is benefiting from the implied volatility rise into earnings, what it’s really doing is far more intelligent.

The option prices for the at-the-money straddle will show very little time decay over this 5-day period, so what this strategy really does is buy “five days” of potential stock movement with what is actually fairly small downside risk.

WHAT HAPPENED
This is it — this is how people profit from the option market. A few clicks of preparation makes all the difference in the world.

 

Published: 2017-05-11

PREFACE
There is a way to trade options right before earnings announcements in Regeneron Pharmaceuticals Inc (NASDAQ:REGN) that has benefited from the rising implied volatility but avoids the risk into the actual earnings and also avoids any kind of stock direction risk.

This approach has returned an annualized rate of 242%.

STORY
The question every option trader, whether professional or amateur, has long asked is if there is a way to profit from the known implied volatility rise into earnings. It turns out that over the long-run, for stocks with certain tendencies like Regeneron Pharmaceuticals, the answer is actually, yes.

THE OPPORTUNITY
What a trader wants to do is to see the results of buying an at the money straddle a few days before earnings, and then sell that straddle just before earnings. The goal, is two-fold: (i) to benefit from that known implied volatility rise, and (ii) to own the straddle for a very short period of time when the stock might move ‘a lot,’ but taking no earnings bets.

If either of those two phenomena occur, there’s a very good chance this wins, if neither occur, the amount risked is normally quite small. Here is the setup:

 

We are testing opening the position 6 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 at-the-money straddle:

RETURNS
If we did this long at-the-money (also called ’50-delta’) straddle in Regeneron Pharmaceuticals Inc (NASDAQ:REGN) over the last two-years but only held it before earnings we get these results:

Long At-the-Money Straddle
* Monthly Options
* Back-test length: two-years
* Open 6-days Before Earnings
* Close 1-day Before Earnings
* Holding Period: 5-Days per Earnings
Winning Trades: 5
Losing Trades: 3
Pre-Earnings Straddle Return:  26.5
Annualized Return:  242

 

We see a 26.5% return, testing this over the last 8 earnings dates in Regeneron Pharmaceuticals Inc. That’s a total of just 40 days (5 days for each earnings date, over 8 earnings dates). That’s an annualized rate of 242%.

We can also see that this strategy hasn’t been a winner all the time, rather it has won 5 times and lost 3 times, for a 63% win-rate.

As important is that not only did the strategy win more often that it lost (5 wins, 3 losses) but the average win was $1,780 and the average loss was $847 (using a 5-lot straddle).

When a strategy wins more often than it loses, and the average of a winning trade is actually larger in dollars than the average losing trade, you end up with these out-sized gains.

WHAT HAPPENED
This is it — this is how people profit from the option market. A few clicks of preparation makes all the difference in the world — and it’s not about guessing which stocks will go up or down.

 

Published: 2017-05-09
LEDE
One option trade after NVIDIA Corporation (NASDAQ:NVDA) posts earnings has been a consistent winner and takes no earnings risk and no stock direction risk.

You can watch a video case study of this strategy below for Visa, Apple and Goldman Sachs, or read the article, which focuses on Nvidia.

 

NVIDIA Corporation Earnings
While most of the focus is on the actual earnings move for a stock, that’s the distraction when it comes to the option market. For NVIDIA Corporation, irrespective of whether the earnings move was up or down, if we waited two-days after the stock move, and then bought a 40/20 delta iron condor, the results were quite good and remarkably consistent over time.

Here is an image of the strategy timing:

 

We can examine this, objectively, with a custom option back-test. Here is our earnings set-up:

 

Rules
* Open Long Iron Condor 2 days after earnings
* Close Long Iron Condor 29 days later
* Use the 30-day option

Here are the results over the last year:

 

That’s a 113% return, with 7 winning trades and 4 losing trades. The total holding period was less than one full year. No earnings risk was taken, no stock direction risk was taken, but a long volatility bet was taken, after the vol crush.

The Logic
This strategy does not take stock direction risk, so bull or bear market, it “should” perform the same. Here’s how this strategy did over two-years

 

That’s a 114% return, on 5 winning trades and 2 losing trades. We note the implication that it looks like between 3-years and 2-years ago, the strategy did very little since the return is essentially unchanged. Here’s how it did over the last year:

 

That’s a 67.8% return on 2 winning trades and 2 losing trades. Finally, over the last six-months:

 

Now it’s a 47.9% return with 1 winning trade and 1 losing trade.

It is interesting to note that the winning percentage has always hovered around 50%-70%, so this not a panacea. It is a strategy, which, over time, irrespective of the time frame, has created a sizable winning return.

WHAT HAPPENED
There are patterns to stock behaviors before and after earnings and those patterns reveal opportunities in the option market, without taking the actual risk of earnings. You can find them, stock by stock.

 

Date Published: 2017-05-9

This article can read below or watched as a video:

LEDE
This is a simple option trade that starts two-days after Netflix Inc (NASDAQ:NFLX) earnings and lasts for the one month to follow, that has been a winner for 3 straight years.

Netflix Inc (NASDAQ:NFLX) Earnings
While the mainstream media likes to focus on the actual earnings move for a stock, that’s the distraction when it comes to the option market.

For Netflix Inc, irrespective of whether the earnings move was up or down, if we waited two-days after the stock move, and then sold a one-month out of the money put spread, the results were simply staggering. We use two-days to allow the stock to fully reach equilibrium post earnings.

We can examine this intelligent approach, objectively, with a custom option back-test. Here is our earnings set-up:

 

Rules
* Open short put spread 2-days after earnings
* Close short put spread 29 days later
* Use the 30-day options

RETURNS
If we sold this out-of-the-money put spread in Netflix Inc (NASDAQ:NFLX) over the last three-years but only held it after earnings we get these results:

Intelligent Short Put Spread
* Monthly Options
* Back-test length: three-years
* Open 2-days After Earnings
* Close 29-days Later
* Holding Period: 28-Days per Earnings
Winning Trades: 11
Losing Trades: 1
Post-Earnings Short Put Spread Return:  77
Annualized Return:  84

We see a 77% return, testing this over the last 12 earnings dates in Netflix Inc. That’s a total of just 336 days (28 days for each earnings date, over 12 earnings dates).

We can also see that this strategy hasn’t been a winner all the time, rather it has won 11 times and lost 1 times, for a 92% win-rate.

MORE TO IT THAN MEETS THE EYE
While a short put spread is a strategy that gains profits if the underlying stock “doesn’t go down a lot,” there is more to this with Netflix Inc.

What we’re after with this approach is identifying companies that make their large stock move the day after earnings — whether that’s up or down — and after that, find a sense of equilibrium in the stock price for the next month. This is what we find in Netflix Inc (NASDAQ:NFLX).

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

We hope, if nothing else, you have learned about Netflix Inc (NASDAQ:NFLX) and the intelligence and methodology of option trading and this idea of equilibrium right after earnings.

Published: 2017-05-08
LEDE
One option trade after Twitter Inc (NYSE:TWTR) posts earnings has been a consistent winner and takes no earnings risk and very little stock direction risk.

Twitter Inc Earnings
For Twitter, irrespective of whether the earnings move was up or down, if we waited two days after the stock move, and then sold an out of the money put spread, the results were simply staggering.

We can examine this, objectively, with a custom option back-test. Here is our earnings set-up:

 

Rules
* Open short put spread 2 days after earnings
* Close short put spread 29 days later
* Use the 30-day option

Here are the results over the last year:

 

That’s a 41.4% return, with 4 winning trades and 0 losing trades. The total holding period was less than 4 full months, meaning the annualized return was over  120% . No earnings risk was taken — this is not a coin flip over earnings.

The Logic
This strategy works beautifully in Facebook, but with Twitter Inc, even naysayers can’t criticize this strategy as “only working because we’re in a bull market.” Twitter stock has performed awfully post earnings. Here is a 2-year stock chart, where the earnings dates are designated by an “E” icon and circled in red:

 

It’s the exception, not the rule, when Twitter Inc (NYSE:TWTR) doesn’t gap down off of earnings. But the logic behind this trade follows a narrative that even after a bad earnings release, if we wait two days after, we find the stock at a point of equilibrium.

If it gapped down — that gap is over. If it beat earnings, the downside move is already likely muted. Here’s how this strategy has done over the last 6-months:

 

That’s an 11.5% return, on 2 winning trades and 0 losing trades. Since this is a total of a two-month holding period, that 11.5% is actually a  70% annualized.

If you’re curious, yes, this also produced positive returns over the last 3-years, even though the stock has so under-performed as a buy and hold investment, and done so poorly on earnings calls.

WHAT HAPPENED
There are patterns to stock behaviors before and after earnings and those patterns reveal opportunities in the option market, without taking the actual risk of earnings. You can find them, stock by stock, like Apple and Google before and after earnings.

This is how people profit consistently from the option market — it’s preparation, not luck — and it’s not about guessing which stocks will go up or down, or guessing which stocks will beat earnings.

 

Published: 2017-05-05
LEDE
This is a simple option trade that starts the day after Ambarella Inc (NASDAQ:AMBA) earnings and lasts for the one month to follow, that has been a winner for 3 straight years.

Ambarella Inc (NASDAQ:AMBA) Earnings
While the mainstream media likes to focus on the actual earnings move for a stock, that’s the distraction when it comes to the option market.

For Ambarella Inc, irrespective of whether the earnings move was up or down, if we waited one day after the stock move, and then sold an one-month out of the money put spread, the results were simply staggering.

We can examine this, objectively, with a custom option back-test. Here is our earnings set-up:

 

Rules
* Open short put spread one day after earnings
* Close short put spread 29 days later
* Use the 30-day options

RETURNS
If we sold this out-of-the-money put spread in Ambarella Inc (NASDAQ:AMBA) over the last three-years but only held it after earnings we get these results:

 

We see a 69.4% return, testing this over the last 12 earnings dates in Ambarella Inc. That’s a total of just 360 days (30 days for each earnings date, over 12 earnings dates).

We can also see that this strategy hasn’t been a winner all the time, rather it has won 11 times and lost 1 times, for a 92% win-rate.

Here are the results or the last year:

 

So we can see it has worked for all of the most recent four earnings releases. This is not a panacea — there is no guarantee this will work.

What we see is that over time, this has worked quite consistently and we have a strong rationale to explain it. Here is that rationale.

MORE TO IT THAN MEETS THE EYE
This strategy does not take on the risk of earnings, and while it’s slightly bullish, it really isn’t a stock direction investment either. In many ways, earnings results are just a coin flip — and we are not interested in flipping coins with option strategies.

What we’re after with this approach is identifying companies that make their large stock move the day after earnings — whether that’s up or down — and after that, find a sense of equilibrium in the stock price for the next month. This is what we find in Ambarella Inc (NASDAQ:AMBA) .

We can see that this idea has been a winner more times than it has been a loser — a 92% win-rate. It’s that positive win-rate that has created that large 70% annualized return.

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

 

Published: 2017-05-04
LEDE
There is a simple option trade that starts the day after Facebook Inc (NASDAQ:FB) earnings and lasts for one month that has won for three straight years without a loss.

FACEBOOK EARNINGS
While it’s fun to focus on the actual earnings move for a stock, that’s the distraction when it comes to options. For Facebook Inc, irrespective of whether the earnings move was up or down, if we waited on day after the stock move, and then sold an out of the money put spread, the results were simply staggering.

We can examine this, objectively, with a custom back-test. Here is our custom earnings set-up:

 

Rules
* Open short put spread one day after earnings
* Close short put spread 29 days later
* Use the 30-day option

Here are the results over the last three-years:

 

That’s a 104% return, with 11 winning trades and 0 losing trades. The total holding period was 11 months. No earnings risk was taken — this is not a coin flip over earnings.

Here’s how it did over the last two-years.

 

That’s a 54.6% return, on 7 winning trades and 0 losing trades. Since this is a total of a seven-month holding period, that 54.6% is actually 93.6% annualized.

Finally, we examine the last year:

 

We see a 34.4% return, on 3 winning trades and 0 losing trades. Since this is just a total of a three-month holding period, that is a 137.6% annualized return. In other words, the trade has continued to work, and the returns are not getting weaker.

WHAT HAPPENED
As great as this trade looks, it is not a panacea. this is not a sure thing — don’t eve let anyone tell you that at trade will always win.

But, there are patterns to stock behaviors before and after earnings and those patterns reveal opportunities in the option market, without taking the actual risk of earnings. This is how people profit from the option market — it’s preparation, not luck.

 

 

Published: 2017-05-03
LEDE
Tesla Inc, with all of its stock volatility and uncertainty, follows a beautiful pattern after earnings are released and it makes for an opportunity with options. But, we are waiting for the volatile stock move after earnings to happen, and in that next 30-days of equilibrium, we find a gem.

TESLA INC AFTER EARNINGS
We can examine this, objectively, with a custom back-test. Here is our custom earnings set-up:

 

Said plainly, we will open our position one day after earnings, and close it 30 days later. We are using the 30-day options (monthly option) and we are simply selling an out of the money put spread.

To be clear, after the big earnings move, when the price finds an equilibrium, for the 30-days following, is a bet that the stock “won’t go down a lot,” has been a big winner.

Note: For the most current earnings release, this trade would have opened with the stock at $295.

Here are the results over the last three-years:

 

While that 95.3% return looks tasty, it’s actually better than it seems. We treat Tesla’s quarterly sales press releases as earnings events too, as any truly knowledgeable trader would. In total, there were 23 earnings and quarterly sales releases in this 3-year period, so that would be 23 trades.

That’s 23 trades, each for one month, for a total holding period of 23 months. We see 15 winning trades and 8 losing trades. This isn’t a panacea — it’s real analysis — where we look for edge, and repeating patterns. Where risk taken is less than the reward received.

It’s a fair question to ask if this strategy actually works over different time periods. Here are the results over the last two-years:

 

Now we see a 61.2% return over the last sixteen earnings releases. The short-put spread was a winner 12-times, and it was a loser 4-times. Again, the trade was a winner the majority of the time, not all of the time. But this is a strategy, not a one-time gamble.

Finally, we examine the six-months:

 

That’s a 33.3% return over the last three earnings releases, and all three trades were winners, while not taking any risk of the actual earnings release.

WHAT HAPPENED
There are patterns to stock behaviors before and after earnings and those patterns reveal opportunities in the option market, without taking the actual risk of earnings.

This is how people profit from the option market — it’s preparation, not luck. This same opportunity exists in other stocks — avoid earnings risk — identify edge –now it’s your turn to go find them.

Discovering Volatility in Twitter Inc

 

PREFACE
There is a wonderful secret to trading options right before earnings announcements in Twitter Inc (NYSE:TWTR) , and really many stocks, that benefits from the rising implied volatility but avoids the risk into the actual earnings release and also avoids any kind of stock direction risk.

This approach has returned 23.7% with a total holding period of just 40 days, or a annualized rate of 216%. Now that’s worth looking into and remembering for the next earnings release in a few months.

STORY
Everyone knows that the day of an earnings announcement is a risky event for a stock. This can be explicitly seen in the option market, where the implied volatility (the expected stock move) rises into the earnings event.

Here is a great illustration of that reality using Google, just as as simple example, and a chart of its 30-day implied volatility over the last two-years, before we turn to Twitter Inc . While the implied volatility ebbs and flows, it generally rises into earnings, which are denoted in the chart below with the “E” icon. We circled the rise in yellow for convenience.

 

The question every option trader, whether professional or amateur, has long asked is if there is a way to profit from this known volatility rise. It turns out, that over the long-run, for stocks with certain tendencies, the answer is actually, yes.

THE WONDERFUL SECRET
What a trader wants to do is to see the results of buying an at the money straddle a few days before earnings, and then sell that straddle just before earnings. The goal, is two-fold:

(i) to be to benefit from that known implied volatility rise.
(ii) to own the straddle for a very short period of time when the stock might move ‘a lot.’

If either of those two phenomena occur, there’s a very good chance this wins, if neither occur, the amount risked is normally quite small.

Here is the setup:

 

We are testing opening the position 6 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 at-the-money straddle:

RETURNS
If we did this long at-the-money (also called ’50-delta’) straddle in Twitter Inc (NYSE:TWTR) over the last two-years but only held it before earnings we get these results:

 

We see a 23.7% return, testing this over the last 8 earnings dates in Twitter Inc. That’s a total of just 40 days (5 days for each earnings date, over 8 earnings dates). That’s a annualized rate of 216%.

We can also see that this strategy hasn’t been a winner all the time, rather it has won 3 times and lost 5 times, for a 37% win-rate and again, that 23.7% return in less than two-full months of trading.

WHAT HAPPENED
This is how people profit from the option market — it’s preparation, not luck. This same opportunity exists in other stocks — avoid earnings risk — identify edge — now it’s your turn to go find them.

Published: 2017-05-01

LEDE
While all the focus is on Apple Inc (NASDAQ:AAPL) earnings, the really serious opportunity in the option market is actually after earnings.

APPLE INC AFTER EARNINGS
Apple Inc (NASDAQ:AAPL) has a tendency after earnings to trail off. That is, the stock tends to move in one direction or the other for the following month, and that makes for a wonderful opportunity with options.

We can examine this, objectively, with a custom back-test. Here is our custom earnings set-up:

 

Said plainly, we will open our position two-days after earnings, and close it 30 days after. We after testing using the 30-day options (monthly option) and we are buying the at-the-money (also called the “50 delta”) straddle.

Here are the results over the last three-years:

 

That’s not a typo — that’s 206% over the last three-years, but since we are only testing the one-month following earnings, that 206% return came after just 11-months of a holding period. We note that the straddle was a winner 5-times, and a loser 7-times. So, this is not a panacea, not a magic bullet, it is objective analysis that has been a giant wealth creator over time.

The trade was a winner about half of the time — the winners were just much (much) larger than the losers. It’s a fair question to ask, or at least the curious mind would want to know, if this strategy actually works over different time periods. Here are the results over the last one-year:

 

Now we see a 74.7% return over the three earnings releases. The straddle was a winner once, and it was a loser 2-times. Again, the trade was a winner a little less than half the time but the average win was $3380 while the average loss was just $351. This is a strategy, not a one-time gamble.

WHAT HAPPENED
This is how people profit from the option market — it’s preparation, not luck. This same opportunity exists in other stocks — avoid earnings risk — identify edge –now it’s your turn to go find them.

 

 

Published: 2017-04-27

This analysis can be seen in a video or read as an article below the video.

LEDE
As of this moment, everything has changed.

There is a way to trade options right before earnings announcements in Google, and all stocks, that benefits from the rising implied volatility but avoids the risk into the actual earnings release. This approach has returned nearly 90% in Alphabet Inc (NASDAQ:GOOGL) options with a total holding period of just 55-days.

PREFACE
Everyone knows that the day of an earnings announcement is a risky event for a stock. This can be explicitly seen in the option market, where the implied volatility (the expected stock move) rises into the earnings event.

Here is a great illustration of that reality using Alphabet Inc and a chart of its 30-day implied volatility over the last two-years. While the implied volatility ebbs and flows, it always rises into earnings, which are denoted in the chart below with the “E” icon. We circled the rise in yellow for convenience.

 

The question every option trader, whether professional or amateur, has long asked is if there is a way to profit from this known volatility rise. It turns out, that over the long-run, for stocks with certain tendencies, the answer is actually, yes.

Yes, there is a systematic way to trade this repeating phenomenon, without making a bet on earnings or stock direction.

 

THE WONDERFUL SECRET
What a trader wants to do is to see the results of buying an at the money straddle a few days before earnings, and then sell that straddle just before earnings. The goal, at first, appears to be to benefit from that known implied volatility rise, but as we will see soon, there is actually much more to gain from this trade.

This trade is not a panacea, which is to say, we have to test it, stock by stock, to see when and why it worked. We start with Alphabet Inc (NASDAQ:GOOGL). Here is the setup:

 

We are testing opening the position 6 days before earnings and then closing the position 1 day before earnings. We are not making any earnings bet.
Once we apply that simple rule to our back-test, we run it on an at-the-money straddle:

 

We see an 89% return, testing this over the last 11 earnings dates in Google. That’s a total of just 55 trading days (5 days for each earnings date, over 11 earnings dates).

Read that last part again: just 55 total trading days. By trading just the 6 days before earnings we are seeing an annualized return of over 500%.

We can also see that this strategy hasn’t been a winner all the time, rather it has won 8 times and lost 3 times, for a 72.7% win-rate and again, that staggering 89% return in less than two-full months of trading.

This approach as also been a large winner over the last two-years:

 

We see a 41.9% return over seven earnings releases, with 5 winning trades and 2 losing trades, or a 71.4% win-rate.

BUT WHAT’S REALLY HAPPENING?
While this strategy is benefiting from the implied volatility rise into earnings, what it’s really doing is far more intelligent.

The option prices for the at-the-money straddle will show very little time decay over this 5-day period, so what this strategy really does is buy “five free days” of potential stock movement. If that sounded weird, here it is in black and white:

The first trade in this 2-year back-test was to purchase the 557.5 strike straddle in Google on July 10th, 2015 in anticipation of the earnings that came out on July 16th. The opening straddle was purchased for $29.20.

But, between July 10th and July 15th (the date the straddle was closed), here’s what Google stock did:

 

While no news was released during this time with respect to earnings, the stock climbed in anticipation of the event. That rise made owning the straddle a winner — it was sold at $35.40 which was a 21% winner in five days.

Of course, if the stock had declined, that would have been an equally big winner. But the real moment of clarity is to understand that if the stock did nothing, the straddle was about breakeven.

So, what we’re really seeing here is that owning this earnings straddle just a few days before the event, and selling it right before the event, gets us a window of a sort of “very cheap bet,” where the upside is enormous, and the downside is quite limited.

As an example of the limited risk, we can turn to the earnings event the next year, on July 28th, 2016. Here’s what Google’s price did:

 

The stock basically went nowhere and so did the straddle. It was opened for $41.70 and was closed for $41.75.

The trade was a wash, but, it gave us those few days to potentially have a stock move with muted risk. Over time, having this “low risk five-day option,” turned into a monster winner. There were some small losers, some small winners, some large winners, but there were no large losers.

WHAT HAPPENED
This is how people profit from the option market — it’s preparation, not luck. This same opportunity exists in other stocks — avoid earnings risk — identify edge –now it’s your turn to go find them.

 

 

Published: 2017-04-26
LEDE
There has been edge in Starbucks Corporation options, and it has led to nearly 200% returns over the last 3-years while the stock was up just 80%.

PREFACE
WHAT IS EDGE?
One of the great beauties of option trading is that the market prices the ‘greeks,’ which serve as a measure of probability.

If a trade wins more often than the probability that is priced in, it has edge.

 

Here is that same thought process, but in English: A 30 delta (out of the money) put should end up in-the-money about 30% of the time (delta is roughly a measure of probability). In other words, if we sold a 30 delta put, we would expect that we could have a winner 70% of the time.

EDGE
Now, back to our idea of edge. If we can find an option strategy that has a 30 delta, but if selling it wins more than 70% of the time, then we have edge. Even further, even if it wins ‘just’ 70% of the time, if the net profit is positive, then that’s another measure of edge.

When we have both, we have a great trading result, and that is exactly what we find with Starbucks Corporation.

 

Starbucks Corporation (NASDAQ:SBUX)
If we test selling a 30 delta / 5 delta put spread, every 30-days in Starbucks over the last 3-years, this is what we find:

 

That’s a 198% return, versus a stock return of 80%. Even further, and back to our discussion of edge, the strategy had 34 winning trades and 6 losing trades for a win-rate of 85% — far above a 70% win-rate we might expect.

For context here is how the short put spread (in red) has done relative to the stock (in gray).

 

But this isn’t the end of the analysis — there is one more step we need to make. While the CMLviz Trade Machine™ Pro (back-tester) allows us to identify edge quickly, it does more than that. Selling a put spread is bullish strategy in that it becomes a winning trade if the stock rises, or, if the stock “doesn’t go down a lot.”

It’s fair to wonder if simply buying a call spread would have been better than selling a put spread. Here is how that approach has done over the last 3-years, done every 30-days.

 

Even though Starbucks stock has been up 8% in this time period, and even though selling a put spread returned nearly 200%, it turns out that buying the call spread was in fact a losing strategy.

WRAPPING IT UP
We can do these same tests over two-years as well. First, here is the return of that same short put spread over two-years:

 

That’s a 69.2% return, while the stock was up just 23%. And, even further, we see 21 winning trades versus 5 losing trades, for an 80.8% win-rate.

Here is the strategy (in red) versus the stock (in gray):

 

Options are volatile over the short-run, but as time progressed, the short put spread vastly outperformed the stock. And, for the curious, here is how the long call spread did during this time:

 

A 67.7% losing strategy, even though the stock was up. It’s not a magic bullet — it’s just easy access to objective data.

For completeness, here are the results of the short put spread over the last year:

 

That’s a 20.1% return, with a 76.9% win-rate. The stock returned 7.3% in the last year.

WHAT JUST HAPPENED
This is it — this is how people profit from the option market — it’s preparation, not luck.

 

Published: 2017-04-24
LEDE
Owning Apple Inc options, without taking a position on stock direction, has been a winner over the last three-, two-, and one-year, but only with a deft hand and a proper understanding of the stock volatility.

PREFACE
Apple Inc (NASDAQ:AAPL) has unique stock volatility, and from those dynamics (or, in English, “patterns”), we can show how an option strategy that owns option premium has been a winner. Here is the two-year stock chart:

 

What we see, above all else, irrespective of stock direction, is that the price tends to move with momentum. Said a little bit more like English, the stock doesn’t have many “quiet periods,” rather when it rises, it tends to keep rising or when it falls, it tends to keep falling.

This means there are three critical steps to trading options in Apple Inc we need to address.

STEP I: EARNINGS HANDLING
Let’s start with a comparison of owning an at the money iron condor and trading it every 30 days. The left side is this strategy done only during earnings, and the right side is done at all times (including earnings):

 

Owning option premium during earnings has been a net loser, returning -9.4% over the last two-years. But, owning option premium during all-times has been a net winner, with an 11.9% return. It’s clear that step one of our strategy is to avoid earnings.

Here are the results of owning that same iron condor, but this time, always avoiding earnings.

 

As expected given our first test, avoiding earnings takes the option premium owning strategy up to a 33.8% return over the last two-years. Now, on to step two:

STEP II: STOP LOSS
It turns out that closing a losing iron condor when it hits a certain level has actually helped returns. That is, a risk mitigation strategy does both: reduce risk and improve returns. Here is the simple setting in our test:

 

We note that the setting “At Normal Trading” is short hand for this implementation: If the stop loss is hit, close the position, and wait the rest of the month before entering a new iron condor. And here are the return differences:

 

By adding a risk protection that effectively cuts the risk in half, from a possible 100% loss in any month down to 50%, the actual return rose from 33.8% to 39.7%. This is step two, and now we will make use of that stock chart from the top of the article, and implement step 3.

STEP III: STOP LOSS AND STOCK DYNAMICS
We noted that Apple Inc stock does tend to move with momentum. That phenomenon gives us reason to believe that if a stop loss is triggered, which would happen if Apple stock is in a rather low volatility stretch, we might expect that this “quiet period” will end quickly and getting back into owning options sooner rather than later, could be a good idea.

Here is the simple setting in our test:

 

Notice that this time the “Immediately” setting has been chosen rather than “At Normal Time.” This setting is short hand for: “If a stop loss is triggered, close the original position out, and immediately (the same day) open a new iron condor using the next month’s options.” And here are those return differences:

 

All of a sudden the return nearly doubles, from 39.7% to 64.8%, and this time the only difference in our strategy was the timing of the re-entry into the option position after a stop loss was triggered.

We did a lot here, so let’s just take a step back and see it all in one summary:

 

Our three-step process revealed a 64.8% winner, up from a 9.4% loser, and reduced risk twice buy eliminating earnings and using a stop loss. Apple stock is up 12% over this two-year period, so the option strategy returned about five-fold the stock. Even better, it took less time to figure this out with the right tools than it did to read this article. Tap a few buttons — that’s pretty much it.

CONSISTENCY
This approach also worked well over a one-year time period.

 

That’s a 110% return by owning the iron condor and (i) avoiding earnings, (ii) using a stop loss, and (iii) re-entering a new position immediately following a stop. Apple stock is up 38% over this one-year period.

WHAT JUST HAPPENED
This is how people profit from the option market — it’s preparation, not luck. Even further, the CMLviz option back-tester is the conduit to finding these results.

 

Published 4-19-2017
LEDE
In a bull market, selling puts or put spreads is generally a good bet — but with Morgan Stanley (NYSE:MS), it turns that owning options, rather than selling them, has been monster winner over 3-years, 2-years, 1-year and even the last 6-months.

PREFACE
Morgan Stanley stock has actually been more volatile than you might have expected. For a company that isn’t really a takeover candidate, doesn’t really face a black swan downside risk and is generally considered a leader in its industry, the stock has not been settled.

Here is the three-year stock chart via Yahoo! Finance:

 

Getting long Morgan Stanley options can take many forms, but perhaps the simplest is a long, out-of-the-money strangle.

STRANGLES
Buying a strangle means buying both a call and a put. Here is how that strategy has done over the last 3-years, trading every month, and always avoiding earnings.

 

We see a 446% return while the stock was up 40%. But, owning options is also a risky investment in that it is an investment that “something” will happen to the stock. Here is how that option strategy (in red) has done relative to the stock (in gray) over those 3-years.

 

A chart is wonderful in that it really gets at the point — while this strategy was a gigantic winner, it was filled with risk. We can see it bobbing up and down through time.

But, as risky as this has been, it has, surprisingly, worked over all time periods. Here are the results over the last 2-years, again, trading monthly and always avoiding earnings.

 

That’s a 173% return when the stock rose just 16%. Again, here is the option strategy (in red) compared to the stock (in gray).

 

Yet again, we can see the risk inherent in the options — but when it comes down to it, it has been a big winner, returning nearly 10-fold the stock. Next we look at the last year:

 

That’s a 59.6% return while the stock has risen 59%. For the shorter time frame, the stock and options actually performed very similarly.

WHAT JUST HAPPENED
In a time when option portfolios may be leaning short puts and put spreads, it’s nice to find an alternative to diversify that overarching short volatility bet in a name that has consistently shown more realized volatility than the options were pricing in.

What an interesting result and an interesting hedge to a short vol option portfolio.

This is how people profit from the option market — it’s preparation, not luck.

 

 

Published: 2017-04-17
LEDE
Using a risk reversal to get long Alibaba Group Holding Ltd (NYSE:BABA) but adding a stop loss and always avoiding earnings as risk limiters, has so outperformed the stock it’s almost unbelievable. But these are the facts.

PREFACE
In a toppy market and risky geopolitical landscape, it may seem odd to look at an aggressively bullish option strategy. But, given that Alibaba Group Holding Ltd (NYSE:BABA) is one of the two mega cap technology leaders in China, perhaps it’s time to take a look outside of the United States.

Getting long Alibaba Group Holding Ltd (NYSE:BABA) with options can take many forms. Buying calls or call spreads, or selling puts or put spreads, each one makes sense for a specific type of investment. But one approach gets long with more risk in the hunt for greater returns.

RISK REVERSAL
Buy a call means paying out of pocket for option premium — although it does create a bullish position. But, selling a put to fund the purchase of that call actually creates a credit, leaves the upside of the call, and even benefits if the stock doesn’t “go down very much.” Of course, there is now more downside risk.

Before we address that extra risk, let’s look at the results of “selling a risk reversal,” which in English means, buying an out of the money call and selling an out of the money put. This is over two-years and we note, we taking the extra risk precaution of always avoiding earnings and trading every two-weeks.

 

Just owning a long call returned only 9.3%. But, when we sell a put to cover the premium, we see a 50.2% return. The stock was up 40% during this time. While the trade avoided the risk of earnings, it does have a heap of risk to the downside when compared to the long call by itself.

Let’s address that risk by implementing a stop loss:

 

Selling a naked put can lose several hundred percent, but with a stop loss, we have tried to cap that loss, in this case, no more than 75% in a two-week period. The short put part of this strategy has been changed to look like this:

 

And with less risk, it turns out this risk reversal strategy has turned into a massive winner:

 

A long call returned just 9.3%. A long call funded by selling a put returned 50.2%. But, when we add another layer of risk protection with a stop loss, we see that trade turn into a 227% return — again, the stock was up 40% in this time period.

SUCCESS THROUGH TIME
Next we examine this strategy over the last year.

 

That’s a 94.9% return while the stock rose 39.5%. We can test this over the last six-months as well:

 

That’s a 130% return while the stock was up just 7.2%. Yes, we’re looking at about 18-fold the stock return.

While this is certainly a risky strategy, we did temper that risk by:
* Always avoiding earnings
* Using a stop loss

WHAT JUST HAPPENED
This is how people profit from the option market — it’s preparation, not luck.

 

 

Published 4-12-2017
LEDE
As NVIDIA Corporation (NASDAQ:NVDA) stock has met a new found volatility, often times surrounding differing views from Wall Street analysts, a deft hand and a clever option investor may have an opportunity to profit from the stock swings, irrespective of the direction.

PREFACE
The volatility in NVIDIA Corporation (NASDAQ:NVDA) shares over the last year and even pinpointing down to the last six-months has opened up an opportunity in the option market.

Owning Option Premium
Here are the results of owning naked options in NVIDIA over the last year — we’re looking at out-of-the-money strangles, and always avoiding earnings.

 

Just owning out of the money options has returned nearly 80% over the last year — but there’s a huge risk in this approach.

IMPROVE
Instead of buying naked options in Nvidia to invest in a strategy that benefits from stock volatility, we will sell options that are further out of the money to offset the expense of the purchases. The strategy we are going to look at is called a condor (or an iron condor). Here are the results of both avoiding earnings and selling out of the money options against the long options:

 

It’s remarkable, but these are the realities of option trading. The results went from a 79.7% gain, to a 95.5% gain by reducing risk — that is, by selling options against the long options.

We can do this over the last six-months as well:

 

Now we see a 65.8% return as the stock has returned 48% — and again, this strategy does not make a stock direction bet — either way will do, volatility is the key.

WHAT JUST HAPPENED
This is how people profit from the option market — it’s preparation, not luck.

 

 

Published 4-11-2017
LEDE
There has been a way to profit from Tesla Inc (NASDAQ:TSLA) irrespective of stock direction, but it takes a deft hand and a clever investor that makes two adjustments to turn in outsized returns.

PREFACE
Likely the single most important decision when trading options is whether to buy or sell the premium. Even with Tesla Inc (NASDAQ:TSLA) stock’s realized volatility, owning options has been a losing trade — unless we make a smart adjustment.

Owning Option Premium
Here are the results of owning naked options in Tesla Inc over the last three-years — we’re looking at out-of-the-money strangles.

 

Irrespective of Tesla Inc’s large stock moves, recently — this strategy has been a disaster — a 49.4% loss while the stock has been rising.

IMPROVE
Our first step in improving the results is to eliminate the risk of earnings. Options are much more expensive during earnings periods, for good reason, and it’s well worth our time to the see impact on the original strategy of removing earnings trading:

 

The returns went from a 49.4% loss to a 13.3% gain. But now we make the really important move:

Instead of the naked buying of options, we will sell options that are further out of the money to offset the expense of the purchases but still invest in a strategy that profits from stock volatility.

 

The strategy we are going to look at is called an iron condor, which is just a fancy way of saying, “sell options further out of the money of the ones you purchased.” Here are the results of both avoiding earnings and selling out of the money options against the long options:

 

It’s remarkable, but these are the realities of option trading. The results went from a 49.4% loss, to a 13% gain by avoiding earnings, and now to a 99.5% gain by selling options to offset the long options.

During this time period, the stock was up 57%. Yes, betting on either direction has profited more than betting on a long only position.

We can do this over the last six-months as well:

 

Now we see an 88.8% gain while the stock is up 55% in that same time. And again, the appeal to owning options in this way is the removal of stock direction bias — up or down, the stock direction doesn’t matter, it’s the volatility that we’re after.

WHAT JUST HAPPENED
This is how people profit from the option market — it’s preparation, not luck.

 

Written by Ophir Gottlieb

LEDE
There has been a way to profit from Amazon.com Inc (NASDAQ:AMZN) irrespective of stock direction, but it took a deft hand and a smart investor.

PREFACE
Likely the single most important decision when trading options is whether to buy or sell the premium. It turns out that even though implied volatility (the price of options) has been very low for Amazon.com Inc (NASDAQ:AMZN), the stock’s historically low realized stock volatility has made owning options a disaster — unless we make a clever adjustment.

Owning Option Premium
Here are the results of owning naked options in Amazon over the last year. Moving from left to right we go from the at the money straddle, to slightly more out of the money strangles.

 

The only thing we can say with confidence is that the results are consistent across the spectrum — about a 78% loss over the last year for owning options in Amazon.

IMPROVE
Our first step in improving the results is to eliminate the risk of earnings. Options are much more expensive during earnings periods, for good reason, and it’s well worth our time to the see impact on the original strategy of removing earnings trading:

 

And now the results:

 

The losses have gone from 78% to as low as 11.6%. But now we make the really important move:

Instead of the naked buying of options, we will sell options that are further out of the money to offset the expense of the purchases. The strategy we are going to look at is called an iron condor. Here are the results of both avoiding earnings and selling out of the money options against the long options:

 

It’s remarkable, but these are the realities of option trading. We have gone from a 78% loss, down to an 11% loss by avoiding earnings, and now to a 35% winner by selling options to offset the long options.

We can do this over the last six-months as well:

 

Now we see a 154% gain while the stock is up just 7% in that same time. And again, the appeal to owning options in this way is the removal of stock direction bias — up or down, the stock direction doesn’t matter.

WHAT JUST HAPPENED
This is how people profit from the option market — it’s preparation, not luck. This same approach, with its own twist, has worked very well for Apple Inc (NASDAQ:AAPL), yielding 137% returns over the last year.

 

LEDE
Trading options in JPMorgan Chase & Co.(NYSE:JPM) using a strategy that profits from the stock “not going down a lot,” has vastly outperformed the stock — and in an era where President Donald Trump is now targeting legislation that regulates banks, it’s time to take a closer look.

PREFACE
The big four banks, JPMorgan Chase & Co (NYSE:JPM), Bank of America Corp (NYSE:BAC), Wells Fargo & Co (NYSE:WFC), and Citigroup Inc (NYSE:C) have suddenly become front and center news as the Federal Reserve juggles interest rates and the federal government begins discussions of changes to federal regulations — specifically Donald Trump’s phrase of a ‘haircut’ for Dodd–Frank bank regulations.

Reuters reported the following (our emphasis added):

U.S. President Donald Trump said on Tuesday that his administration is working on changes to Dodd-Frank banking regulations that will make it easier for banks to loan money.”[W]e’re going to be doing things that are going to be very good for the banking industry [.] We’re going to do a very major haircut on Dodd-Frank.” Trump said.

 

With those words from Donald Trump, it’s time to look at the banks as an investment vehicle — but with a twist.

JPMorgan Chase & Co (NYSE:JPM)
Let’s focus on JPM as an investment vehicle.

Selling a put is in fact an investment strategy that benefits from the stock “not going down a lot.” Perhaps in an aged bull market, that investment thesis is an alternative to one that profits from the stock rising. That is, perhaps there is a “Trump put” for bank stocks… perhaps.

While that sounds tame, if not boring, it has been far from that. Here is what selling an out of the money put has returned in JPMorgan Chase & Co.(NYSE:JPM) over the last 3-years:

 

That’s a 76.9% return while the stock was up just 60%. But, that’s not where the real strategy lies. Selling a naked put is a risky investment, and that risk elevates as earnings announcements approach.

But now there is a facility for us to explicitly see the impact of earnings on a strategy, by tapping a button:

 

And the impact has been remarkable:

 

That initial 76.9% return over three-years turned into 158% over the same time period by simply avoiding earnings. This phenomenon can fly by quickly on a computer screen — here’s what we found — more than double the return with less risk.

Here is a graphical display of the stock return in gray and the option strategy — avoiding earnings — in blue.

 

CONSISTENT
Skepticism is natural — what we need to do now is look at this short put over various time periods. We see that it has worked over the last three-years, now let’s look at the last two-years:

 

That’s a n86.3% return while avoiding earnings versus 70.4% when making no adjustment for that risk. Further, the stock itself has been up just 51% compared to that 86.3% with options.

It’s not a magic bullet — it’s just easy access to objective data. Investing in the idea that JPM stock will “not go down a lot” has actually far outperformed owning the stock — which is an investment in the idea that “the stock will rise.”

Finally, we look at this short put over the last six-months, these are the results:

 

Again we find better returns with less risk. And for context the stock is up 33% versus the 58.3% for the option strategy that avoids the risk of earnings.

Perhaps in a period where Donald Trump will work with Congress to reduce regulations, this thesis is compelling enough to examine for all of the mega banks.

WHAT JUST HAPPENED
This is how people profit from the option market — it’s preparation, not luck.

 

Published 4-3-2017
LEDE
The airline stock prices have not all participated in the bull market, but using options to invest in the idea that the stocks “won’t go down a lot,” has in fact been a massive winner, and as important, has revealed the gem all option traders seek — “edge.”

PREFACE
Selling a put is in fact an investment strategy that benefits from the stock “not going down a lot.” And while that sounds tame, if not boring, it has been far from that. Here is what selling an out of the money put has returned in Delta Airlines over the last 3-years:

 

That’s a 105% return while the stock was up just 37%. Further, the strategy showed 32 winning trades and 7 losing trades, for a win-rate of 82%, and that brings us to a critical point:

If a trade wins more often than the probability that is priced in, it has edge.

Here is that same thought process, but in English: A 30 delta (out of the money) put should end up in-the-money about 30% of the time (delta is roughly a measure of probability). In other words, if we sold a 30 delta put, we would expect that we could have a winner 70% of the time.

EDGE
If we can find an option strategy that has a 30 delta, but if selling it wins more than 70% of the time with a positive return, then we have edge. This is exactly what we found with Delta Airlines over three-years.

CONSISTENT
Skepticism is natural — what we need to do now is look at this short put over various time periods. We see that it has worked over the last three-years, now let’s look at the last two-years:

 

That’s a 65.7% return while the stock itself has been up just 9%, and again we see a win-rate above the 70% we would expect with a 30-delta option.

It’s not a magic bullet — it’s just easy access to objective data.

Finally, we look at this short put over the last six-months, these are the results:

 

That’s a 27.4% return while the stock has been up just 16% — and again — the 85.7% win-rate is larger than the 70% the option market was pricing in.

WHAT JUST HAPPENED
This is how people profit from the option market — it’s preparation and edge discovery, not luck.

Published 3-29-2017
LEDE
What we’re going to look at could feel uncomfortable — it’s a glaring example of how the top 0.1% have been dissecting retail traders for decades. But it’s objective data — this is how option professionals find the edge they require to keep going.

Simply investing in an idea that Alphabet Inc (NASDAQ:GOOGL) stock won’t face a serious stock decline has so outperformed owning the stock out-right that it’s almost inconceivable — but these are the facts, and they are not disputed.

STORY
Selling out of the money put spreads is an option investment that has a very clear belief system: The underlying stock simply will not go down a large amount. If that reality exists, the returns can be substantially larger than simply owning the stock.

But, with some care, we can turn that strategy into one with even less risk, and still get the out-sized returns — and that is what we see with Amazon.

DISCOVERY
Let’s look at selling a put spread in Alphabet every month for the last 2-years, but also putting a further layer of protection by putting in a stop loss. Here is the difference in the profit loss graph, where the red line is a normal short put spread and the blue line is a short put spread with a stop loss added.

 

We can see a normal short put spread does have a risk control in place — there is a maximum loss. But, adding in a stop loss makes the maximum loss even tighter. Applying this to Alphabet Inc (NASDAQ:GOOGL) has been a staggering winner. For those that are tech heavy investors, the exact same phenomenon has been true for Amazon.com Inc (NASDAQ:AMZN).

OPTIONS
Here is how the unadjusted risk short put spread has done in Alphabet Inc.

 

But, we can limit the risk even further with a stop loss — like this:

 

Finally, here are the side-by-side results compared.

 

That’s a 311% return, taking less risk than a normal short put spreads, but most importantly, that compares to the stock return of 50%. Here is a chart illustrating the double risk protected option strategy (in yellow) versus the stock return (in gray).

 

IT WORKS CONSISTENTLY
What we need to do now is look at this short put spread over various time periods. We see that it has worked over the last two-years, now let’s look at the last year, comparing it side-by-side with the strategy that does not use a stop loss:

 

We see a 70.5% return versus an 18.5% return, with less risk. And, to add context, here is how this option strategy has done relative to the stock. And the stock… it’s up just 9.8% in the last year. Finally we can look at the side-by-side comparison over the last six-months.

 

Here is how it has done over the last six-months for Amazon:

 

It’s not a magic bullet — it’s just access to objective data. For the record, this implementation in Amazon.com Inc (NASDAQ:AMZN) returned 106% in 6-months while the stock has been up just 11%.

What Just Happened
This is how people profit from the option market — it’s preparation, not luck.

 

Published 3-28-2017
LEDE
It’s the magic and frustration of the option market — choosing an option strategy, even if we have direction right, can mean the difference between a massive win and a loss. This is the difference between success and failure — there’s no guessing, ever.

PREFACE
Veeva Systems Inc (NYSE:VEEV) is the new tech marvel that is dominating the cloud services space for companies with highly sensitive data — namely biotech and pharma. Here is the two-year stock chart:

 

But, what we’re going to look at could feel uncomfortable — it’s a glaring example of how the top 0.1% have been dissecting retail traders for decades. But its objective data — this is how option professionals find the edge they require to keep going.

OPTIONS
If a stock rises, a reasonable instinct is to test buying call options. If we did that for Veeva every week over the last-two years, these were the aggregate results:

 

It seems almost impossible, but buying weekly calls has done nothing while taking a lot of risk. The next reasonable approach would be to test call spreads, and that’s what we show below:

 

The return remains miniscule for a stock that has risen so abruptly. This is where mastering trade analysis comes in. We can next check a slightly different approach — a strategy that profits if the stock “doesn’t go down a lot.” It’s actually less bullish than a long call or call spread.

Here are those results if done weekly over the last two-years:

 

Suddenly we see a 316% return. The strategy return so outperforms the other two common bullish approaches for several reasons, but the real key here is just access to this information. We kid you not, it was this easy — tapping buttons:

 

Just tap a strategy and see the results.

We told you it might feel uncomfortable — the fact that some people have access to this information and others don’t.

CONSISTENT
Skepticism is natural — trading isn’t a game and that means we have to prove to ourselves that this isn’t luck or happen stance.

What we need to do now is look at this short put spread over various time periods. We see that it has worked over the last two-years, now let’s look at the last year:

 

We see a 273% return over the last year.

It’s not a magic bullet — it’s just easy access to objective data.

WHAT JUST HAPPENED
We don’t mean to make you feel uncomfortable, but this is it — the difference between the professionals and the amateurs. This is how people profit from the option market – it’s preparation, not luck.

 

 

Published 3-27-2017
PREFACE
Two seemingly contradictory phenomena are equally true for International Business Machines Corp (NYSE:IBM) stock, and together they have created a wonderful option trading result for years.

STORY
Selling out of the money puts is an option investment that has a very clear belief system: The underlying stock simply will not go down a large amount. If that reality exists, the returns can be substantially larger than simply owning the stock. In this case, a low volatility stock, like IBM, can represent opportunity — that’s one phenomenon — but the other appears contradictory.

This is a two-year stock chart for IBM, with the blue “E” icons denoting an earnings event.

 

We have highlighted the several occasions where IBM stock has not done well off of earnings releases — often times showing abrupt moves down from the reports. This is the second phenomenon. If we take all of this together, here is how selling out of the money put spreads in IBM every month has done over the last 2-years.

 

While the stock itself has been up 15%, selling the put spreads has actually been a loser. But, remember those two phenomena we discovered — IBM could be a wonderful trading vehicle for options, if we could eliminate the risk of earnings. Here’s how to test that idea with the tap of the mouse:

 

And here are the staggering results:

 

Yep, we have seen an 8% loser turn into a 145% winner by simply avoiding earnings. That 145% return compares to 15% for the stock, or nearly a 10x return. We have accepted the two phenomena surrounding IBM, (i) it has been a relatively low volatility stock and (ii) the first phenomenon is true only when we remove the risk of earnings.

IT HAS WORKED CONSISTENTLY
What we need to do now is look at this short put spread over various time periods. We see that it has worked over the last two-years, now let’s look at the last year:

 

A 45% return has been increased to 109%, and the second approach takes less risk by avoiding earnings.

The results aren’t a magic bullet — it’s just access to objective data.

For completeness, here is the side-by-side comparison over six-months:

 

What Just Happened
This is how people profit from the option market — it’s preparation, not luck, and simply having easy access to data can mean the difference between losing wealth and gaining it.

 

Published 3-24-2017
LEDE
What we’re about to look at could feel uncomfortable, not in that it’s difficult, but rather that it’s a glaring example of how the top 0.1% have been dissecting retail traders for decades. But its objective data — this is how option professionals find the edge they require to keep going.

PREFACE
Arista Networks Inc (NYSE:ANET) is the young technology company that has burst onto the seen as the first legitimate competitor for Cisco Systems Inc (NASDAQ:CSCO) and it is rapidly gaining market share in various areas, in particular the high-speed data center switching market:

 

It’s these switches and routers that power every computer in every cloud.

Arista Networks Inc (NYSE:ANET)
When trading options we need to answer three critical questions:

* What to trade
* When to trade
* When to close the trade

Arriving at an answer to these questions has had staggering implications. It’s also been a disaster for those that have not been prepared.

What to trade: Let’s examine selling out of the money put spreads in ANET.
When to trade: Let’s now compare examine selling the weekly options versus the monthly options.

 

Look, while trading partners, pundits or just general social media gurus may belly-ache and proclaim that the difference between trading a weekly option 4 times a month or a monthly option once a month is no different — they are wrong and they will cost you money.

It might have felt like a trivial difference — to trade weekly or monthly options — but it isn’t trivial at all. Selling a weekly out of the money put spread in ANET over the last two-years has returned -44.7% while simply switching to the monthly option has returned 102%. It really does matter — and it’s different for each stock.

We told you it might feel uncomfortable — the fact that some people have access to this information and others don’t.

Now that we know the what to trade and the when to trade, we must objectively answer when to close.

Reduce Risk
A short put spread has downside protection but it’s one of the most common questions traders have with selling option premium — “when do you close the trade?”

It turns out that if a put spread was sold for, say $2.00, closing that put spread out once it drops in value to $0.30 has had a large impact on results for Arista Networks Inc. Here’s how we account for our limit gain:

 

And now, the results:

 

We have now fully answered the what to trade, when to trade it, and when to close it specifics of our option trades. The final question we need to answer is if this result has been persistent through time.

CONSISTENT
Skepticism is natural — trading isn’t a game and that means we have to prove to ourselves that this isn’t luck or happen stance.

What we need to do now is look at this short put over various time periods. We see that it has worked over the last two-years, now let’s look at the last year:

 

A -29.7% return, when we switched to monthly options and followed a rule of when to close turned into an 81.2% gain.

It’s not a magic bullet — it’s just easy access to objective data.

Finally, we look at this short put spread over the last six-months, these are the results:

 

Yet again, when we have access to objective data, our what to trade, when to trade, and when to close rules have turned a large loser into an even larger winner.

WHAT JUST HAPPENED
This is it — the difference between the professionals and the amateurs. This is how people profit from the option market – it’s preparation, not luck.

 

 

 

Published 3-22-2017
PREFACE
While Nvidia Corporation (NASDAQ:NVDA) is rightfully garnering all of the headlines for its successes in end-to-end machine learning and artificial intelligence that are driven by its GPU processors, there is a smaller technology company that is competing — Advanced Micro Devices Inc (NASDAQ:AMD).

While AMD stock has been ripping, there is a risk conscious approach to options that benefits from the stock “not going down a lot,” and it has performed exceedingly well.

Advanced Micro Devices Inc (NASDAQ:AMD)
What we’re about to look at could feel uncomfortable, not in that it’s difficult, but rather that it’s this simple — and it is a glaring example of how the top 0.1% have been dissecting retail traders for decades. But it’s objective data — this is how option professionals find the edge they require to keep going.

When trading options we need to answer three critical questions — what to trade, when to trade and when to close the trade. Here’s how knowing the answer to those questions has meant more than 200% returns over the last year in Advanced Micro Devices Inc.

What to trade: Let’s examine selling out of the money puts in AMD.
When to trade: Let’s now compare examine selling the monthly options versus the weekly options.

 

It might have felt like a trivial difference — to trade weekly or monthly options — but it isn’t trivial at all. Selling a weekly out of the money put in AMD over the last two-years has returned -28% while simply switching to the monthly option has returned 73%. But we are just beginning our journey to discovery.

Now that we know the what to trade and the when to trade, we must objectively answer when to close.

Reduce Risk
A short put actually has tremendous downside — so we need to make a risk adjustment to this strategy. While a short put can see a several hundred percent loss in any given trade, we can put a stop loss on each trade to limit that black swan risk. That answers when to exit the downside.

 

We also need to answer “when to close on the upside.” It turns out that if a put was sold for, say $1.00, closing that put out once it goes down to $0.10, has had a large impact on results as well. Here’s how we account for both our stop loss and limit gain:

 

And now, the results:

 

We have now fully answered the what to trade, when to trade it, and when to close it specifics of our option trades. The final question we need to answer is if this is just luck.

Is This Really Analysis, or Just Luck
Skepticism is natural — trading isn’t a game and that means we have to prove to ourselves that this isn’t luck or happen stance.

What we need to do now is look at this short put over various time periods. We see that it has worked over the last two-years, now let’s look at the last year:

 

A 176%% return, when we chop the risk down and close at the right time, has turned into a 202% return over the last year in Advanced Micro Devices, Inc (NASDAQ:AMD).

It’s not a magic bullet — it’s just easy access to objective data.

Finally, we look at this short put over the last six-months, these are the results:

 

While the risk reduction strategy actually didn’t help returns, the point is that it didn’t really hurt returns — we are seeing similar reward for far (far) less risk. Yet again, when we have access to objective data, our what to trade, when to trade, and when to close rules have worked.

What Just Happened
This is it — the difference between the professionals and the amateurs. This is how people profit from the option market – it’s preparation, not luck.

 

Published: 2017-03-21
PREFACE
While the tech stocks like Netflix Inc (NASDAQ:NFLX) and Apple Inc (NASDAQ:AAPL) have been getting all the headlines, it turns out that the little remembered, ‘boring,’ basic materials company Helmerich & Payne, Inc. (NYSE:HP) has seen its stock price return less than a 1% change in the last two-years, but that makes using options a tremendous winner — as in, more than 50% in 6-months, tremendous.

Helmerich & Payne, Inc. (NYSE:HP)
HP is in the rather un-sexy business of contract drilling of oil and gas wells. That’s great, because as an option instrument it has exactly what we’re looking for — calm.

When trading options we need to answer a few questions like — what to trade, when to trade and when to close the trade. Here’s how knowing the answer to those questions has meant more than 80% returns over the last two-years, and 50% in the last six-months for HP.

What to trade: Let’s examine selling out of the money puts in HP.
When to trade: Let’s examine the impact of earnings.

 

It might have felt like a trivial difference — but it isn’t trivial at all. Selling an out of the money put in HP Inc over the last two-years has returned just 6.4% and carried substantial downside risk. But, by simply doing this:

 

We see a 6.4% return leap to 36.4%, or a 9x increase with less risk. But we’re not done. We still need to address the downside risk of a naked short put and figure out when to close the trade.

Reduce Risk
A short put actually has tremendous downside — so we need to make a risk adjustment to this strategy. While a short put can see a several hundred percent loss in any given trade, we can put a stop loss on each trade to limit that black swan risk.

 

This move has totally changed the risk:return profile our the option strategy from the red line to the blue line:

 

And here are the results of using a safety valve in our short put compared to the unprotected one:

 

We have taken a 6.4% return, limited risk, and turned it into a 36.4% return by avoiding earnings. Then we limited risk further with a stop loss, and turned that return into 83.7%, in a stock that has essentially gone nowhere in two-years.

Here is a chart of the stock return versus the double risk protected option strategy:

 

We have now fully answered the what to trade, when to trade it, and when to close it specifics of our option trades. The final question we need to answer is if this is just luck.

Is This Really Analysis, or Just Luck
Skepticism is natural — trading isn’t a game and that means we have to prove to ourselves that this isn’t luck or happen stance.

What we need to do now is look at this short put over various time periods. We see that it has worked over the last two-years, now let’s look at the last year:

 

A 32.5% return, when we chop the risk down, has turned into a 85.9% return over the last year. Recall, Netflix Inc (NASDAQ:NFLX) and Apple Inc (NASDAQ:AAPL)stocks are up 44% and 34%, respectively, while the ‘boring’ Helmerich & Payne, Inc. (NYSE:HP) stock, due to its stock dynamics, has returned 85.9% with risk protected options. We are seeing outperformance.

It’s not a magic bullet — it’s just easy access to objective data.

Finally, we look at this short put over the last six-months, these are the results:

 

Yet again, when we have access to objective data, our what to trade, when to trade, and when to close rules have worked.

What Just Happened
This is it — the difference between the professionals and the amateurs. This is how people profit from the option market – it’s preparation, not luck.

 

 

Published 3-20-2017
PREFACE
Simply investing in an idea that Walt Disney Co (NYSE:DIS) stock won’t face a serious stock decline has so outperformed owning the stock out-right that it’s almost inconceivable — but these are the facts, and they are not disputed.

To motivate our quick note, here is a chart which shows how a very special risk adjustment in an option strategy has done relative to the stock over the last two-years. The gray curve is the stock return and the highlighted curve is the option strategy.

 

STORY
Selling out of the money puts is an option investment that has a very clear belief system: The underlying stock simply will not go down a large amount. If that reality exists, the returns can be substantially larger than simply owning the stock.

But, with some care, we can turn that strategy into one with even less risk, and still get the out-sized returns — and that is what we see with Walt Disney Co.

DISCOVERY
Let’s look at selling a put in Walt Disney Co every week. This is not the optimal approach, but it gives a baseline.

 

That’s a 43.1% return over two-years but there are tremendous risks to this strategy, namely, earnings risk and uncovered downside risk. There’s also a piece that very few people address which is, when do you close the position if its a win?

ANSWERING ALL THE QUESTIONS
First, we can see how this short put strategy in Walt Disney Co did if we eliminated the risk of earnings:

 

We have totally removed the risk of earnings by simply closing our positions two-days before the event, waiting for it to happen, and then opened the position up again two-days after.

The next risk we need to address is the naked downside risk of a short put. While we’re at it, we need some sort of measurable decision system for when to close the put if its winning. First, we put a stop loss on the short puts and chop the downside off. Here is how that looks:

 

The profit of a “normal” short put across various stock prices looks like the red line. But, if we put a stop loss on that strategy, we get the blue line. We have effectively removed a substantial part of that downside.

Our last step is to decide when to close our short puts. Our approach will be simple, if we sell a put and it loses 75% of its value — which means the position has gained 75%, we just close it. Putting numbers to it, if we sold a $1.00 option, if it got down to $0.25, we would just go ahead and buy it back for the win.

Testing the effectiveness of this approach is this easy — we do it at the same time as the stop loss:

 

And finally, here are the results of our very well defined short put strategy:

 

We took a rather risky 43.1% return, removed the risk of earnings and saw the returns rise to 60.4%, then we finally removed yet further risk with a stop loss, and even put in a strict rule of when to close the trade, and all of a sudden we saw an 87% gain.

Reprising that image from the top of the story — this work has led to an 87% return while the stock has been up just 6.1%.

 

IT WORKS CONSISTENTLY
What we need to do now is look at this short put over various time periods. We see that it has worked over the last two-years, now let’s look at the last s-x-months:

 

That 35.9% return compares to a stock rise of 21.6%.

The results aren’t a magic bullet — it’s just access to objective data. This is it — the difference between the professionals and the amateurs. This is how people profit from the option market – it’s preparation, not luck.

 

PREFACE
Simply investing in an idea that Amazon.com Inc (NASDAQ:AMZN) stock won’t face a serious stock decline has so outperformed owning the stock out-right that it’s almost inconceivable — but these are the facts, and they are not disputed.

ACCESS
What we’re about to look at could feel uncomfortable, not in that it’s difficult, but rather that it’s this simple and this important — a glaring example of how the top 0.1% have been dissecting retail traders for decades. But it’s objective data — this is how option professionals find the edge they require to keep going.

STORY
Selling out of the money put spreads is an option investment that has a very clear belief system: The underlying stock simply will not go down a large amount. With some care, we can turn that strategy into one with even less risk, and still get the wildly out-sized returns — and that is what we see with Amazon.

This is option expertise — and it’s critically important.

DISCOVERY
Let’s look at selling a put spread in Amazon every week, but also putting a further layer of protection by putting in a stop loss. Here is the difference in the profit loss graph, where the red line is a normal short put spread and the blue line is a short put spread with a stop loss added.

 

We can see a normal short put spread does have a risk control in place — there is a maximum loss. But, adding in a stop loss makes the maximum loss even tighter. Applying this to Amazon.com Inc (NASDAQ:AMZN) has been a staggering winner.

OPTIONS
Here is how that risk adjusted short put spread has done in Amazon over the last two-years:

 

That’s a 243% return simply because the stock didn’t collapse, while the stock price itself was up 127%.

IT WORKS CONSISTENTLY
What we need to do now is look at this short put spread over various time periods. We see that it has worked over the last two-years, now let’s look at the last year:

 

We see a 208% return. And, to add context, here is how this option strategy has done relative to the stock.

 

The gray line is the stock price, up 54%, while the highlighted line is the option strategy, up 208%. Yes, nearly a quadrupling of the stock return, using a risk protected option strategy. Here is how it has done over the last six-months:

 

That’s a 106% return, versus the stock return of 10%, or more than a 10-fold increase. For completeness, here again is the stock chart versus the option chart:

 

It’s not a magic bullet — it’s just access to objective data.

What Just Happened
This is how people profit from the option market — it’s preparation, not luck. This same approach has worked for Apple Inc (NASDAQ:AAPL) and Facebook Inc (NASDAQ:FB) as well.

 

 

PREFACE
While the tech stocks like Netflix have been getting all the headlines, it turns out that specialty beauty retailer Ulta Beauty Inc (NASDAQ:ULTA) has been a monster winner in this bull market. Here are the two stock returns, with Ulta in red and Netflix Inc in yellow.

 

But, with the right information, a risk conscious option strategy has been the real news and one of the best performers over the last two-years, one-year and even six-months.

ACCESS
What we’re about to look at could feel uncomfortable, not in that it’s difficult, but rather that it’s this simple and this important — a glaring example of how the top 0.1% have been dissecting retail traders for decades. But it’s objective data — this is how option professionals find the edge they require to keep going.

Ulta
When trading options we need to answer a few questions like — what to trade, when to trade and when to close the trade. Here’s how knowing the answer to those questions has meant nearly 200% returns in Ulta, a return that beats even the mighty Netflix.

What to trade: Lets examine selling out of the money puts in ULTA.
When to trade: Lets also examine weekly options (weekly trading) versus trading every two-weeks.

 

It might have felt like a trivial difference — but it isn’t trivial at all.

Trading every two-weeks has turned a 69%return into a 141% return. And even further, it has seen a profitable trade 73.2% of the time, versus 69% of the time, while accruing less commissions.

We have answered the what to trade and the when to trade, but we still need to know when to close.

When to Close
A short put actually has tremendous downside — so we need to make a risk adjustment to this strategy. While a short put can see a several hundred percent loss in any given trade, we can put a stop loss on each trade to limit that black swan risk.

 

This move has totally changed the risk:return profile our the option strategy from the red line to the blue line:

 

And here are the results of using a safety valve in our short put compared to the unprotected one:

 

We have taken a 141% return, limited risk, and turned it into a 194% return. We have now fully answered the what to trade, when to trade it, and when to close it specifics of our option trades. The final question we need to answer is if this is just luck.

Is This Really Analysis, or Just Luck
Skepticism is natural — trading isn’t a game and that means we have to prove to ourselves that this isn’t luck or happen stance.

What we need to do now is look at this short put over various time periods. We see that it has worked over the last two-years, now let’s look at the last year:

 

A 66% return, when we chop the risk down, has turned into a 118% return over the last year. Recall, Netflix Inc (NASDAQ:NFLX) stock, the tech phenomenon, is up less than 45% in the last year and Ulta stock is up 53%. We are seeing out performance.

It’s not a magic bullet — it’s just easy access to objective data.

Finally, we look at this short put over the last six-months, these are the results:

 

Yet again, when we have access to objective data, our what to trade, when to trade, and when to close rules have worked.

What Just Happened
This is how people profit from the option market — it’s preparation, not luck. We had a hunch — we were methodical in our plan, and it worked.


 

Published: 2017-03-16
PREFACE
The S&P 500 (INDEXSP:.INX) is up 28% over the last three-years and 17% over the last year, but an option strategy that has invested in the index simply not “going down a lot,” has yielded over 220% returns and further yet, has been successful over three-years, one-year, one-year and even the last six-months.

S&P 500 Index Options
Selling put spreads in the index options is a natural tack when looking to benefit from a bull market, but with an eye on making greater returns as long as the market doesn’t tumble out of control. First we examine which put spreads have worked the best — trading monthly options.

 

If you’re reading this on a mobile device, that image is going to be hard to read, so we’ll spell it out in a table, below:

50 delta: 176%
40 delta: 233%
30 delta: 217%
25 delta: 195%

So, we have a basic framework in place where we can focus on selling the 40 delta put — a little bit out of the money (50 delta means at the money), and now we can try various put spreads in this area.

 

Now we can see that the 40/15 delta short put spread in S&P 500 (INDEXSP:.INX) index options has returned a whopping 233% return, again, while the index is up just 28%.

Here’s a return chart with the index in gray and the short put spread in orange.

 

Is This Really Analysis, or Just Luck
Skepticism is natural — trading isn’t a game and that means we have to prove to ourselves that this isn’t luck or happen stance.

What we need to do now is look at this short put spread over various time periods. We see that it has worked over the last three-years, now let’s look at the last year:

 

It’s not a magic bullet — it’s just easy access to objective data.

The short 40 delta put spreads have returned between 112% – 115% in the last year with the index up about 17%. But, we can also look at the number of winning and losing trades.

Over the last year we see 11 profitable short put spreads and 2 losing spreads, for an 84.6% win rate. For the careful option trader we can see that we have edge here.

A ‘delta’ is roughly a measure of probability — so a long 40 delta put should be in the money about 40% of the time. In our case, selling a 40 delta put should end up in the money 60% of the time. But, instead, we see an 84.6% win rate — that’s actually huge edge — quite unusual in a broad based index.

When we look at this short put spread in the S&P 500 over the last six-months, these are the results:

 

We see 7 winning trades with 0 losing trades, so a 100% win rate, and a 71.8% – 78.5% return depending on the spread that was sold. For context, the S&P 500 (INDEXSP:.INX) has been up 12.2% in the last six-months.

What Just Happened
This is how people profit from the option market — it’s preparation, not luck. We had a hunch — we checked it cross various strikes — we honed in on the sweet spot — we verified the results across all the time frames — we found edge. That’s it.

It doesn’t mean this is going to work in the future, but what it does mean is that of the S&P 500 doesn’t collapse, we have a very good idea of which options to trade and a strong conviction that there could be edge there. That edge has led to 6x returns in the last six-months and about 9x returns over the last three-years.

 

Published: 3-16-2017
PREFACE
Oracle Corporation (NYSE:ORCL) beat earnings on Wednesday, 3-15-2017, after the bell and the stock is having one of its best days in years. But even with this run up, the stock is up just 6% in the last two-years.

The compelling part of Oracle Corporation (NYSE:ORCL) as an investment for option traders is exactly this phenomenon — it’s a large, safe stock that hasn’t seen a lot of volatility and that makes it a prime candidate for an option trade — but, we there is one extra piece of knowledge we need to make it a huge out performer.

Oracle Stock Tendencies
Oracle’s stock is calm, as noted above, but oddly, selling a put spread to benefit from that calm has not done well over the last two-years, or that’s what Wall Street would have us think.
Here is how selling an out of the money put spread every month has done over the last two-years

 

That’s a trade that has returned negative 9.3% in a stock that is up about 6%. But, there’s so much more to this story. We can see what happens if we avoid earnings — that is, while we sell a monthly out of the money put spreads — when earnings come around, we simply skip that week. Here are the results.

 

By removing the enormous risk of earnings, the -9.3% return has turned into a 54.1% return, while taking away that lump in our throat called earnings. Here is a chart that shows the return of the layman’s short put spread strategy in red, the stock price in gray, and the short put spread that avoids earnings in blue.

 

We see the following:

* Normal short put spread: -9.3%
* Stock Price: +6%
* Short put spread avoiding earnings: +54.1%

Is This Really Analysis, or Just Luck
Skepticism is natural — trading isn’t a game and that means we have to prove to ourselves that this isn’t luck or happen stance. If our trading analysis is correct, this approach should work consistently for all time periods. That is, 2-years, 1-year, and even six-months across the board.

It turns out that this is exactly what we find. Here are the results, side-by-side, for one-year short put spreads in Oracle Corporation (NYSE:ORCL):

 

It’s not a magic bullet — it’s just easy access to objective data. A 29% winner, when shedding a bundle of risk by avoiding earnings, has turned into a 35.5% winner. That’s what we’re looking for — higher returns with less risk. We can even look at how this approach worked over the last six-months:

 

The results over six-months make the math easy — the short put spread, with less risk, has essentially doubled the normal short put spread. We have seen across the board better returns when we avoided that risk.

What Just Happened
This is how people profit from the option market — it’s preparation, not luck.

 

Published 3-15-2017
PREFACE
Skyworks Solutions Inc (NASDAQ:SWKS) has been on a tear of late. It’s a specialty chip maker that makes the guts of each device that will connect the world of IoT and 5G. Here is a one-year stock chart with Skyworks Solutions Inc in red and Apple Inc (NASDAQ:AAPL) in light blue:

 

There’s a reason for that high correlation between the two stocks.

Skyworks Solutions Inc’s (NASDAQ:SWKS) largest customer is none other than Apple Inc (NASDAQ:AAPL). But, here’s the opportunity — the company is quickly diversifying its portfolio of customers and now calls Amazon, Google, and Microsoft clients.

Further the company now powers “China’s Apple,” called Huawei, and the Korean giant Samsung.

Given the upward momentum in Skyworks’ business as well as Apple’s business, there is a clever way to use options to profit from a belief that, at the very least, the stock will not “go down a lot.”

ACCESS
What we’re about to look at could feel uncomfortable, not in that it’s difficult, but rather that it’s this simple and this important — a glaring example of how the top 0.1% have been dissecting retail traders for decades. But it’s objective data — this is how option professionals find the edge they require to keep going.

Skyworks Stock Tendencies
While Skyworks stock has moved higher with Apple’s renewed strength, the stock tends to move in chunks of momentum — or in English, when the stock rises, it tends to do so for an extended period of time, and the same can be said about a decline.

Selling an out-of-the-money put is one of the most common strategies to benefit from a bull market. The strategy has been exceptionally good for Skyworks, but because of the stocks tendencies that we discussed above, we have to be clever in our approach. Let’s take a look.

First, here is how selling an out of the money put every month has done over the last year:

 

While a 59.7% return is huge, as anyone who has traded options knows, there’s a hidden risk here — it puts lump in all of our throats when it comes — and that risk is earnings. Here’s how we get clever.

We can see what happens if we avoid earnings — that is, while we sell a monthly out of the money put — when earnings come around, we simply skip that week. Here are the results.

 

By removing the enormous risk of earnings, the 59.7% return has turned into a 103% return — nearly two-fold higher, while taking away that lump in our throat risk called earnings.

Is This Really Analysis, or Just Luck
Skepticism is natural — trading isn’t a game. Skyworks doesn’t always move with Apple Inc (NASDAQ:AAPL) stock. We have to prove to ourselves that this isn’t luck or happen stance. If our trading analysis is correct, this approach should work consistently for all time periods. That is, 3-years, 2-years and 1-year, across the board.

It turns out that this is exactly what we find. Here are the results, side-by-side, for two-years for Skyworks Solutions Inc (NASDAQ:SWKS):

 

It’s not a magic bullet — it’s just easy access to objective data. A 73.2% winner, when shedding a bundle of risk by avoiding earnings, has turned into a 93.7% winner. We can even look at how this approach worked over the last three-years for Skyworks:

 

The results over three years are less dramatic, but still, the risk of earnings is gigantic, especially when selling options. We have seen across the board better returns when we avoided that risk.

What Just Happened
This is how people profit from the option market — it’s preparation, not luck.

 

Published: 2017-03-13
PREFACE
Netflix Inc (NASDAQ:NFLX) has been on an historic run, claiming the top stock return spot for S&P 500 stocks in both 2013 and 2015. While the company has turned into a $60 billion enterprise, there is a very clever way to use options to profit from the run that isn’t immediately apparent, and quite damaging if unaccounted for.

ACCESS
What we’re about to look at could feel uncomfortable, not in that it’s difficult, but rather that it’s this simple and this important — a glaring example of how the top 0.1% have been dissecting retail traders for decades. But it’s objective data — this is how option professionals find the edge they require to keep going.

Netflix Inc (NASDAQ:NFLX) Stock Tendencies
While Netflix stock has exploded higher, the stock tends to move in chunks of momentum — or in English, when the stock rises, it tends to do so for an extended period of time, and the same can be said about a decline.

Selling an out-of-the-money put spread is one of the most common strategies to benefit from a bull market. The strategy has been exceptionally good for Netflix, but because of the stock’s tendencies that we discussed above, we have to be clever in our approach. Let’s take a look.

First, here is how selling an out of the money put spread every week has done over the last three-years:

 

Even though Netflix Inc has seen that historic stock rise, it turns out that blindly selling an out of the money put spread has been remarkably poor — returning 3.9%. It’s almost unbelievable, but this is the reality of the stock’s dynamics and how it affects options. But this is not the end of the analysis — it’s the beginning. The strategy we just looked at must be improved upon, and we start by addressing the risk.

First, we can see what happens if we avoid earnings — that is, while we sell a weekly out of the money put spread every week — when earnings come around, we simply skip that week. Here are the results.

 

By removing the enormous risk of earnings, the 3.9% return has turned into a 37.7% return — nearly ten-fold higher, while taking less risk.

We need to go further. Understanding the reality of Netflix stock dynamics leads to a strategy that lets the winners run, but cuts the losing short put spreads off early — it’s an approach to address the momentum based stock moves.

When selling a put spread the maximum gain is 100% but the loss could have a maximum of much worse than 100%. Let’s establish a trading rule to remedy that:

In any week, if the short put spread loses 100%, let’s cut it off, and trade the next week. We are effectively removing a tail end of downside risk.

 

We can do this with the tap of the mouse:

 

And here are the results using a stop loss and avoiding earnings.

 

The original 3.9% return bumped up nearly ten-fold to 37.7% when we avoided earnings, and then rose another 15% when we cut the down side off with a stop loss.

We see a 13-fold increase in returns but there was no magic bullet, just a systematic approach based exactly on the dynamics of Netflix stock.

Is This Really Analysis, or Just Luck
Skepticism is natural — trading isn’t a game. We can prove to ourselves that this isn’t luck or happen stance. If our trading analysis is correct, this approach should work consistently for all time periods. That is, 3-years, 2-years and 1-year, across the board.

It turns out that this is exactly what we find. Here are the results, side-by-side, for two-years for Netflix Inc (NASDAQ:NFLX):

 

No magic bullet — just objective data. An 80.2% winner, when shedding a bundle of risk by avoiding earnings and then using a stop loss, has turned into a 115% winner. We can even look at how this approach worked over the last year for Netflix:

 

Of all the time periods, this may be the most important. We aren’t seeing small gains turn into larger gains, we are actually seeing a substantial loser turn into a substantial winner all the while taking significantly less risk.

What Just Happened
This is how people profit from the option market — it’s preparation, not luck. Every stock has its own dynamics, we just need to identify them. This could have been Apple, Google, Bank of America, Coca-Cola or literally any stock, and even any ETF. We could have looked at long calls, covered calls, short puts, or anything that fits our comfort zone — and it’s remarkably easy.

 

Published:2017-03-12
ACCESS
What we’re about to look at could feel uncomfortable, not in that it’s difficult, but rather that it’s this simple and this important — a glaring example of how the top 0.1% have been dissecting retail traders for decades. But it’s objective data — this is how option professionals find the edge they require to keep going.

PREFACE
Tesla Inc (NASDAQ:TSLA) Inc has been on an historic run of late much to the dismay of the doubters on Wall Street, and there is an exceptional way to use trading options to profit from the run.

Tesla Stock Tendencies
Buying an at-the-money call (also known as a 50 delta call) is a bullish stance on a stock, but the real secret behind successful option strategies is found in the nooks and crannies of the trade. Let’s take a look.

First, here is how buying a 50 delta call every week for the last 6-months has done.

 

Even though Tesla has seen an historic run, it turns out that blindly buying an at the money call was actually not a very good approach — returning 15.3%. But this is not the end of the analysis — it’s the beginning. The strategy we just looked at must be improved upon, and we start by addressing the risk.

First, we can see what happens if we avoid earnings — that is, while we buy a weekly at the money call every week — when earnings comes around, we simply skip that week. Here are the results.

 

By avoiding earnings, we can see nearly a quadrupling of returns while taking less risk.

We need to go further. Understanding the reality of Tesla’s stock dynamics leads to a strategy that lets the winners run, but cuts the losing calls off early. We can do this by putting in a stop loss. While a long call can lose 100% of its value, what we can do is put in a rule:

In any week, if the call loses 70% of its value, let’s cut it off, and trade the next week. We are effectively removing fully 30% of the downside risk.

 

We can do this with the tap of the mouse:

 

For example, if we bought a $5 call option, if during the week it starts to fade and falls to $1.50 (down 70%), we simply sell it, and don’t wait for it to fade to nothing. We then continue with the same approach the next week.

And here are the results using a stop loss and avoiding earnings.

 

We have gone from a 15.3% return by buying weekly calls, then taken less risk by avoiding earnings and returned 56.9%, and further yet, by cutting off 30% of the downside risk again, we now see 82.5% returns.

In short, we see more than a quintupling of returns while taking substantially less risk. There was no magic bullet, but rather a systematic approach based exactly on the dynamics of Tesla’s stock price tendencies.

Is This Really Analysis, or Just Luck
Skepticism is natural — trading isn’t a game. We can prove to ourselves that this isn’t luck or happen stance. If our trading analysis is correct, avoiding earnings and using a stop loss should have worked better than the normal strategy of just buying and holding for all time periods. That is, 6-months, 1-year and 2-years, across the board.

It turns out that this is exactly what we find. Here are the results, side-by-side, for one-year:

 

No magic bullet — just objective data. A 36.9% loser, when shedding a bundle of risk by avoiding earnings and then using a stop loss, has turned into a 61.3% winner. We can even look at how this approach worked over the last two-years for Tesla:

 

There it is again — knowing when to trade, knowing when not to trade, and knowing when to close the trade, has nearly tripled the results over the last two-years.

What Just Happened
This is it — the difference between the professionals and the amateurs. This is how people profit from the option market – it’s preparation, not luck.

 

Published 3-8-2017
PREFACE
Selling a covered call against long stock can be one of the great income generating option strategies, but it cannot be done in blind faith. In fact, a covered call can be one of the riskiest approaches to options around. Here’s how we can systematically reduce the risk for Amazon, and quadruple the returns while we’re at it.

STORY
There’s just a lot less ‘luck’ involved in successful option trading than many people realize and AMZN is a prime example. Let’s look at a two-year back-test of a covered call with these quick guidelines:

* We’ll test monthly options (roll the trade every 30-days).
* We will avoid earnings.
* We will examine an out of the money call — in this case, 30 delta.
* We will test this covered call looking back at two-years of history.

What we want to impress upon you is how easy this is with the right tools. Just tap the appropriate settings.

 

RESULTS
If we did this 30 delta covered call in Amazon.com Inc (NASDAQ:AMZN) over the last two-years but always skipped earnings we get these findings:

 

Selling a covered call every 30-days in AMZN has been a substantial winner over the last couple of years returning 61%. But here’s the nugget of knowledge we needed to really make this work and not get caught with the big loser.

EARNINGS
Just doing our first step, which was to evaluate the covered call while avoiding earnings is clever — certainly an analysis that gets us ahead of most casual option traders. But let’s take the analysis even further.

We will examine the same idea, but this time we will only look at earnings.

 

While selling a covered call in Amazon.com Inc during earnings did prove to be a winner, more importantly, it returned less than the same covered call that avoided earnings and avoided the potential catastrophe of an earnings run. It’s the question that each trader needs to ask themselves — is the risk of earnings worth that small return, or is the 61% while avoiding that risk better? Whatever your personal preference, now you know, exactly, the risk you are taking.

What Just Happened
This could have been any company — like Apple, Facebook or Netflix, or any ETF. This is how people profit from the option market — it’s preparation, not luck. But even more, this was just one small example, now it’s time to find your own edge.

 

Published: 2017-03-08

PREFACE
Successful option trading is not about grand statements — it’s about small adjustments planned well before the trade that can make the difference between winning and losing. There is a way to profit in the option market in Adobe Systems Incorporated (NASDAQ:ADBE) that actually takes less risk as it outperforms.

Adobe Systems Incorporated (NASDAQ:ADBE) Tendencies
Adobe has a history of beating earnings — that’s what we probably remember — but the reality is, the few times it missed have been a massive disruption to option trading.

If we sold out of the put every week for the last 3-years in ADBE, it looks like a nice winner.

 

It feels like a 43.9% return is good, even great. But it misses the greater truth we noted above about earnings. Here’s what happens to that return if we simply avoided earnings — that is, we did the exact same short put strategy, every week, but when earnings came along, we just stopped trading and let the event occur:

When earnings come around, we stop trading.

 

We can do this with the tap of the mouse:

 

And here are the results, with the risk reduced strategy on the right and the old version on the left for ease of comparison.

 

That 43.9% return has spiked to 78.2%, but it’s more than the added return. What we really did was avoid the risk of earnings — and in that vein, we have added to returns while reducing risk.

THIS ISN’T LUCK
If our analysis is correct, avoiding earnings in ADBE while selling weekly puts should have worked for the near-term as well.

It turns out that this is exactly what we find. Here are the results, side-by-side, for the last year:

 

We see nearly triple the return by simply avoiding risk. We are focusing on the systematic adjustment to the strategy that took less risk and created more wealth.

What Just Happened
The key to option trading is quite simple — understanding the dynamics of the stock you’re looking at allows you to adjust the option strategy to reflect those dynamics. Here is the ADBE stock chart for the last year, but we highlighted earnings dates and the stock moves that came from them — green represents moves higher, and red represents moves lower.

As we noted, there’s no doubt that ADBE has popped off of some earnings reports, but it has also seen some dips. It’s the recognition of that reality, before we place any trades, that has meant all the difference in the world. This is how people profit from the option market — it’s preparation, not luck.

But even more, this was just one small example, now it’s time to find your own edge.

 

PREFACE
Selling a covered call in Amgen Inc (NASDAQ:AMGN) has been hit and miss, but for the clever investor, side-stepping risk has meant better returns.

Amgen Stock Tendencies
Doing a covered call against a long stock position can be a strong income producing strategy, but it can also be very risky when done without proper understanding of the stock dynamics. Make no mistake, a covered call can be wealth destructive.

Here’s what selling a covered call every month for the last two-years has returned in Amgen:

 

That’s a 7.6% return, which is not only pretty unimpressive, it’s also taking on a huge amount of risk which can easily be overlooked. But there’s something going on with Amgen Inc stock that is not easily seen without the right tools.

Here is how that same covered call has worked for the last 2-years, if it was held at all times, but then we simply skipped earnings — we held no position. For ease of comparison, we have put the original strategy on the left, and the new one — skipping earnings — on the right.

 

That 7.6% return has nearly doubled to 13.6%, and even better, this strategy took far less risk than doing the covered call blindly every month.

The key to option trading is quite simple — understanding the dynamics of the stock you’re looking at allows you to adjust the option strategy to reflect those dynamics.

 

We can make this adjustment the tap of the mouse button:

 

IS THIS JUST LUCK?
If our analysis is correct, this strategy of avoiding earnings for the covered call in Amgen Inc should have worked better than the normal strategy of just selling the covered call and holding for the near-term as well.

It turns out that this is exactly what we find. Here are the results, side-by-side, for the last year and the last six-months, respectively:

1-Year

 

6-Months

 

The left had side shows the results of holding the covered call at all times during the last year, and the right hand side shows the results of doing the same, but always avoiding earnings. It’s not just the better returns we are after, it’s avoiding the outsized risk of earnings — when an option position feels like the flip of a coin rather than investment.

What Just Happened
This is how people profit from the option market — it’s preparation, not luck. But even more, this was just one small example, now it’s time to find your own edge with your own ideas.

 

Published 3-3-2017
PREFACE
It’s the secret hidden in plain sight — there is a way to profit in the option market in Celgene Corporation (NASDAQ:CELG) that actually takes less risk as it outperforms.

Celgene Stock Tendencies
You could make a perfectly sound argument that Celgene Corporation (NASDAQ:CELG) is the strongest large cap biotech in the world, rife with a strong pipeline and multiple blockbuster drugs already driving mega profits.

But the biotech sector in general has been burdened by potential drug pricing regulation that has held the stock prices in check. There is a strategy with options that benefits from a stock price staying relatively stable, or a the very least, not going down a lot.

Getting Smart With Options
Selling an out of the put spread benefits if the stock rises, but it also profits if the stock simply doesn’t drop a lot. It’s “semi-bullish,” but really, it’s just “not very bearish.” Here are the results of selling an out of the money put, every week, returned over the last 2-years in Celgene Corporation (NASDAQ:CELG).

 

This strategy seems like a loser, but there’s a detail here that the entire market may be overlooking, which makes it ripe for the picking.

A smart approach to optimizing the reality of Celgene’s stock dynamics is to let the winners run, but cut the losing puts off early. We can do this by putting in a stop loss. While a short put can lose hundreds of percent, it can only profit 100%. We can change that dynamic though:

In any week, if the short put loses falls to a 100% loss, let’s cut it off, and trade the next week.We are effectively removing the vast majority of the downside risk.

 

We can do this with the tap of the mouse:

 

The payoff diagram for the short puts shifts radically:

 

The blue line is a normal short put, while the orange line is the risk adjusted version with a stop loss. We have removed the vast majority of downside risk.

And here are the results, with the risk reduced strategy on the right and the old version on the left for ease of comparison.

 

We can see a 55 percentage point increase in return while reducing the risk dramatically. Yes, we have vastly reduced risk and the return is actually higher. This has taken what looked like an obvious losing trade to an obvious winning trade.

IS THIS JUST LUCK?
If our analysis is correct, this stop loss implementation of shorting a put should have worked better than the normal strategy of just selling and holding for all the near-term as well.

It turns out that this is exactly what we find. Here are the results, side-by-side, for the last six-months

 

We see nearly double the return with less than half the risk. We are focusing on the systematic adjustment to the strategy that took less risk and created more wealth.

What Just Happened
This is how people profit from the option market — it’s preparation, not luck. But even more, this was just one small example, now it’s time to find your own edge with your own ideas.

 

Published 2017-03-03
PREFACE
There has been a unique and profitable opportunity in Broadcom Limited (NASDAQ:AVGO) options that benefits simply from the stock not collapsing.

Broadcom Stock Tendencies
The company’s focus is in wireless and as a chipmaker that supplies chips to help speed up processing in cloud data centers.

Broadcom Limited is best known as the tech marvel that powers Apple’s iPhone, Samsung’s Alphabet Inc (NASDAQ:GOOGL) Android driven devices as well as Google Pixel smartphones with chips that reduce interference from other communications devices. As smartphones get smarter, the company has grown on smartphone demand in China and diversified through acquisitions.

But, with the market near all-time highs it’s a reasonable question to ask if there is way to profit from Broadcom simply not seeing its stock drop a lot rather than a continuation of a stock rise. The answer is a resounding yes.

Getting Smart With Options
Selling an out of the money put spread benefits if the stock rises, but it also profits if the stock simply doesn’t drop a lot. It’s “semi-bullish,” but really, it’s just “not very bearish.” Here are the results of selling an out of the money put spread, every week, returned over the last 2-years in Broadcom Limited.

 

It’s curious how this strategy can actually be a loser even though the stock is ripping. But AVGO has some odd stock dynamics we need to address.

A smart approach to optimizing the reality of Broadcom’s stock dynamics is to let the winners run, but cut the losing put spreads off early. We can do this by putting in a stop loss. While a short put spread can lose upwards of 200% of its value, we can put in a rule:

In any week, if the put spread loses 50% of its value, let’s cut it off, and trade the next week.We are effectively removing three-quarters of the downside risk.

 

We can do this with the tap of the mouse:

 

And here are the results, with the risk reduced strategy on the right and the old version on the left for ease of comparison.

 

We can see a 50 percentage point increase in return while reducing the risk dramatically. Yes, we have reduced risk by 75% and the return is actually higher.

IS THIS REALLY POSSIBLE?
If our analysis is correct, this stop loss implementation of shorting a put spread should have worked better than the normal strategy of just selling and holding for all time periods.

It turns out that this is exactly what we find. Here are the results, side-by-side, for one-year for AVGO:

 

We are focusing on the systematic adjustment to the strategy that took less risk and created more wealth. This has worked over the last 6-months as well:

 

What Just Happened
This is how people profit from the option market — it’s preparation, not luck. But even more, this was just one small example, now it’s time to find your own edge with your own ideas.

 

 

Published 2-27-2017
PREFACE
While a stock portfolio is the cornerstone to investments, let’s take a look at a hedge to that portfolio, or at least a diversification, by looking at the Gold ETF, or more formally, SPDR Gold Trust (ETF) (NYSEARCA:GLD), and a clever way to simply bet that gold prices won’t collapse.

GLD
Selling an out-of-the-money put spread is a bet that an asset price won’t drop a lot. It’s semi-bullish, but mostly just “anti-bearish.” It can be a huge boost in returns, but it must be applied thoughtfully. Here’s how selling a put spread every two weeks in SPDR Gold Trust (ETF) (NYSEARCA:GLD) over the last two-years has done.

 

The results are bad, but that’s actually good news. Because of that result above, the vast majority of traders have abandoned the gold ETF, GLD, with respect to selling put spreads and that means an opportunity exists.

If we take that exact same strategy, but as we implement it we simply set a rule that requires us to close the short put spread if it hits a 100% loss, here are the massively different results. First, here’s how we test the stop loss implementation:

And then the results of that stop loss:

 

We can see a radical change from a 30% loss to a 20% gain. Even better, the trade with the stop loss has much less risk. But, it’s really the last year where the market has started to feel toppy; and that’s where this GLD trade has shown its strength.

Here are the results of the trade in GLD over the last year, the left hand side has the stop loss, the right hand side has no stop loss:

 

Again, we see a 50% difference, and not to belabor the point, but remember, the strategy with a stop loss actually has less risk even though it outperforms the other implementation.

Now, a 79.9% return in the last year with a fairly risk averse option strategy that also includes a stop loss to reduce risk even more is a powerful diversification. But, the reality is, this exercise is about more than just the Gold ETF.

What Just Happened
This is how people profit from the option market — it’s preparation, not luck. But even more, this was just one small example, now it’s time to find your own edge with your own ideas.

 

Published 2-22-2017

NVIDIA
Nvidia has set the world on fire with its explosive GPU technology and the stock has acted appropriately– rising more than any stock in the S&P 500 last year.

But now we find ourselves in a position where, perhaps an aggressive bullish bet isn’t appropriate, but given the latest remarkable earnings beat, perhaps a bet that it “won’t go down that much,” is appropriate.

While that sounds tame, the results, when done correctly, are anything but tame — in fact, they show 240% returns in a year.

 

A CLEVER OPTIONS STRATEGY
Instead of buying calls in Nvidia and betting on a large stock rise, we can look the other direction, and examine selling puts. But, of course, that has a massive risk associated with it. Now, here’s how we get around it.

First, selling a weekly at the money put (50 delta) in Nvidia for the last two-years has done very well. Here’s the set-up:

 

And here are the results:

 

A 197% return with 78 winning trades and 27 losing trades looks pretty nice. But, the elephant in the room is that short puts have a tragically negative downside. This is what the payoff of a normal naked put looks like – a payoff we will not accept.

 

We can do better than that.

 

We can take that same strategy, but rather than leave an open ended downside risk, we can cap it by putting in a stop loss. In this case, we will put in a stop loss at 75%, meaning that if the short put hits a 75% loss, we buy it back, and wait until the next week to trade.

Here’s how we do it:

 

And here are those results:

 

We have just cut the risk of short put off at the knees, and what we find is our return, with less risk, rises from 197% to 232%. Yes, less risk with greater returns.

More broadly, here is what the general payoff of a short put with a stop loss looks like:

 

We can see how a little preparation, before we ever set a trade, has radical results on the return and the risk. And, for the record, here’s how this stop loss shorty put has worked over the last year in Nvidia, trading weekly options.

 

That’s 241% return, winning on 75% of the trades, profiting on the stock “not going down.” Now this approach goes much further than Nvidia, short puts, and stop losses — to the very heart of option trading. Winning is on purpose — it takes a little bit of effort — for a lot of return — and it leads to the deeper reality.

This is how people profit from the option market — it’s preparation, not luck. But even more, this was just one small example, now it’s time to find your own edge with your own ideas.

 

Published 2-21-2017

FINDING EDGE IN VISA
Visa (NYSE:V) stock is up 30% over the last 2-years with the majority of that rise coming in just the last few months. Here’s a quick chart:

 

But, there’s an option strategy that has a nice risk protection in it that has turned that 30% stock return in two-years into 136% in just the last 6-months.

OPTIONS
A ‘delta’ of an option is a proxy for a probability. So, a 40 delta put should end up in the money 40% of the time, or, selling it should end up a winner 60% of the time. But, selling a naked put can be very risky.

Let’s adjust, and instead of selling naked puts, let’s sell a put spread, which has a well defined maximum loss. Here’s how that strategy has done over the last year, trading weekly options.

 

There are two critical pieces of information here:

* First, we see a 149% return from this risk protected strategy.

* Second, we see 23 winning trades and 4 losing trades for an 85.2% win-rate.

Now remember, selling a 40 delta put should win about 60% of the time, but in Visa we see an 85% win-rate.

 

That’s how edge is measured in the option market, and for Visa, we have seen it in the last year. But, that edge does not appear to be a random event. Here are the win-rates for that exact same short put spread over the last three-years and two-years, trading every single week:

3-years

2-years

 

Remember, if we’re above 60% win rates with positive returns, we have edge, and we have serious edge here.

When we focus then on the recent past, the results are massive, but they shouldn’t surprise us after the analysis we just did.

 

Here is how that short put spread, every week, has done in Visa over the last 6-months:

 

That’s a 136% return while the stock is up just 8%. And that return is driven by an 85.7% win-rate versus a market pricing of 60% (this was a test of selling the 40-delta options).

That’s massive, recurring edge.

 

REPEAT THIS
The real analysis goes beyond just Visa (NYSE:V)— and into the SPY, VXX and other individual stocks, like AAPL, AMZN, FB the mega banks and even NFLX or even through the lower risk industries with companies like SBUX and NKE.

Find edge, repeat.

 

This is how people profit from the option market — it’s preparation, not luck. But even more, this was just one small example, now it’s time to find your own edge with your own ideas.

 

Published 2-20-2017

Microsoft
There are a lot of ways to play a bull market with options. The aggressive bullish approach is simply to buy calls, but you better be right on direction, and then some.

There’s also a different approach — to sell naked puts — which is a simple bet that the stock doesn’t go down a lot. It’s less bullish, but has a much higher probability of success.It also has a much larger maximum loss.

 

Here is the payoff of a short put:

 

Before we blow off this strategy as too risky with little upside — try this. Here is what has happened over the last three-years if we sold a 40 delta (out of the money) put in MSFT every week.

 

That’s a 64.8% return and a win rate of 78.7% (there were 122 winning trades and just 33 losing trades). But… we still have that nagging huge loss potential. Let’s get clever.

Let’s do this same strategy, but implement a stop loss at 75%. That means if any short put in any week hits a 75% loss, we buy it back and end the trade until the next week. This makes our maximum gain on any one trade 100% from the short the sale of a put, and just 75% if we cut off the losses early. Here are the results:

 

All of a sudden our return leaps to 113%. But we did something more than just double our returns. Here is what the payoff of a short put with a stop loss looks like in orange, versus the standard short put in blue.

 

All of a sudden, that disproportionate profit versus loss diagram has been turned into a favorable one.

 

Now, we must note that this idea works great in theory, but if a stock is very volatile, the stop loss can do us little good if the stock gaps down. But, that’s why we’re trying it on Microsoft — a steady, calm, mega cap. This also works absolute wonders on Intel.

Now, here are the results for that same strategy over two-years instead of three-years — the left hand side is the normal short put, the right hand side is the one with a 75% stop loss.

 

The risk averse implementation works very nicely over two-years as well. For the record, here’s how we turned the table on Intel short puts:

 

Again, the implementation with less risk dominated the one with more risk.

With Intel, Microsoft, Tesla, Apple and others it actually goes further. If we were to do this same trade but always avoid earnings, we get yet different results. So what’s going on?…

 

This is how people profit from the option market — it’s preparation, not luck. But even more, this was just one small example, now it’s time to find your own edge with your own ideas.


The Magnificence of Option Trading
Those who are prepared can in fact find an edge.

Should we buy calls or a call spread? Maybe we should sell puts or a put spread instead?

Should we trade earnings? Avoid earnings?

What strike(s) should we use?

What expiration? Weekly, monthly, LEAPS?

How often should we trade?

Should we use a stop loss, and if so, where? When?

 

Becoming a successful option trader is this simple: There is no guessing; ever.

You will never guess again.And even better, it’s really easy.

 

This is how people profit from the option market — it’s preparation, not luck.

 

Published 3-01-2017

PREFACE
Amazon.com Inc (NASDAQ:AMZN) has been one of the most remarkable growth stories of the last two-decades and there is an exceptional way to use options to profit from the run.

Amazon.com Inc Stock Tendencies
Buying an at-the-money call (also known as a 50 delta call) is a bullish stance on a stock. Let’s gaining our edge by looking at how buying a weekly 50 delta call every week for the last 2-years has done.

 

This strategy has returned 719% in the last two-years while the stock has risen 120%. But let’s not get caught up in big numbers — that strategy has done nothing to address the risk. In fact, if we look carefully at those results, what we will see is that the calls ended up making money only 43.8% of the time.

That win-rate is actually low — for the record, a 50-delta call (at-the-money) should end in the money 50% of the time (delta is a proxy for a probability). So that means what we really see is that these calls lose often, but when the turn into a win, they really take off.

A proper approach to optimizing this reality, is to let the winners run, but cut the losing calls off early. We can do this by putting in a stop loss. While a long call can lose 100% of its value, what we can do is put in a rule — in any week, if the call loses 70% of its value, let’s cut it off, and trade the next week. We are effectively removing 30% of the downside risk by doing this:

 

And here are the breathtaking results:

 

We took that 719% winner and turned it into a 777% winner — but more importantly we substantially reduced the risk. Now, if our analysis is correct, this stop loss implementation of owning calls should have worked better than the normal strategy of just buying and holding for all time periods.

It turns out that this is exactly what we find. Here are the results, side-by-side, for one-year:

 

Over the last year the results are even more important. We can see a standard long call strategy returned 227% while cutting the risk off with a stop loss turned into a 321% return. Also note that the percentage of winning trades was 46.2% for both. We have done exactly what we set out to do, based entirely on the behavior of Amazon.com Inc’s stock.

Cut off the losers fast, let the winners run.

This intellectually smarter approach to Amazon options worked for the last six-months as well — of course it did.

 

What Just Happened
This is how people profit from the option market — it’s preparation, not luck. But even more, this was just one small example, now it’s time to find your own edge with your own ideas.

Published 2-16-2017

PREFACE
There’s no doubt that the possibility of reduced regulations on the big banks has a special meaning for Goldman Sachs Group Inc (NYSE:GS) — a faux bank which is really a risk taking machine.

Less regulation, any kind of roll back of Dodd-Frank, or however it could look, would give Goldman Sachs more room to take risk with the assets it holds – and in general, that has meant a larger return on assets – as long as we ignore the total collapse of the U.S. housing market back in 2008.

So the question becomes, if we do want to make a bullish bet with options:

How do we make sure we don’t get crushed if we’re wrong but still profit a lot if we’re right?

 

BE SMARTER
One approach to benefiting from Goldman Sachs’ stock rising is actually a bet that it simply does not fall very far. That would be selling a put spread, and if that type of trading schematic feels more like your cup of tea, you can read about that here:
There is a win in Goldman Sachs options right now — and it’s growing

But, if you want to get aggressively long to try to bank this next few months if GS really takes off, then buying slightly out of the money calls has been a huge winner. First we’ll show that, but then we’ll show you how to hedge that just in case things don’t quite work out.

 

The results above come from owning weekly out of the money calls in Goldman Sachs, rolling literally every seven days. While the returns are large, it’s a lot of risk to be naked long an option.

But there’s a risk maneuver we can make.

Here’s what we do:

 

Let’s do the same thing but put a stop loss on the calls at 50%. In English, if a call ever loses 50% of its value in any given week, we simply closed it, and then waited until the next week to open a new one:

 

Now we see returns in the 1800% range, which is 500% percentage points better than the previous strategy, but all we did was cut the risk in half with a stop loss.

Getting naked long calls in any company is risky — but if you’re clever, you can find the names where dropping risk can actually improve returns. That is the crown jewel of trading in any instrument, especially options. So how do we repeat this for other stocks, or even ETFs, and VIX or VXX?

What Just Happened
This is how people profit from the option market — it’s preparation, not luck. But even more, this was just one small example, now it’s time to find your own edge with your own ideas.

Published: 2-14-2017
PREFACE
It’s a reasonable analysis to do — to find a way to make money trading Goldman Sachs options, but rather than betting on large move up in the stock, simply betting that there isn’t a large down move. That’s the place a lot of the financials find themselves now, and GS has a fascinating phenomenon within its options.

STRATEGY
Let’s examine a short out-of-the-money put spread in GS over the last two years, and we’ll look at trading every week (weekly options). Here are the results:

 

A 103% return is fantastic, but there’s a lot of risk here, especially surrounding earnings dates. So, let’s take the next step and do this same test, but eliminate earnings by essentially skipping the earnings week.

 

We can actually see the return is higher at 118% versus 103% even though we took less risk. That’s remarkable. We can also see that the trade had 79 wins and 22 losses, yielding a 78.2% win-rate. This is also our signal that there is edge.

We are examining selling the 30 delta put and buying the 10 delta put. In option speak, the delta is roughly the probability that an option will expire in-the-money. So, while a 30 delta put should end up in the money 30% of the time, that means selling it should be a winner 70% of the time.

But, we can see a 78% win-rate, meaning we have found, in the strictest terms, ‘edge.’ And edge, is the entire goal of option trading. As good as this looks, it turns out the news is actually better. This edge in GS puts, or edge in selling GS puts, has gotten stronger more recently.

Here are the results of selling that put spread over the last 6-months, and always avoiding earnings:

 

Not only are the returns incredibly high, but check out that win-rate percentage. We’re looking at 23 winning trades and 3 losing trades for an 88.5% win-rate. Remember, that 30 delta put should be a winner for a short seller 70% of the time. The edge is sustained, and getting stronger. The result is yet higher returns.

THE KEY
The key here is to find edge, optimize it — in this case by avoiding earnings risk — and then to see if it’s been sustained through time. For GS it has, and that makes for a powerful result. But, we don’t just want one strategy or one stock that has edge — we actually want a portfolio of them.

Diversification with options is no different than diversification with stocks. So, to find a series of these results we need a tool, and that is exactly what we have.

What Just Happened
This is how people profit from the option market — it’s preparation, not luck. But even more, this was just one small example, now it’s time to find your own edge with your own ideas.

 

Published 2-13-2017

PREFACE

It’s a fair question — does selling put spreads in the Nasdaq 100 (QQQ) work, and if so, how do we optimize the results?

 

ANSWER
We start with a simple test — selling out of the money put spreads in QQQ over the last two-years using weekly options. Here are the results:

 

That approach returned 56.5% in two-years with a 74% win rate. But the next questions follow a deeper more intelligent narrative — can we do better?

DOING BETTER
Next we will examine that same strategy, but we’ll use monthly options rather than weekly. This will reduce our commissions and trading frequency.

We see a huge jump in the return from 56% to 83%. Even more, we see our win rate rise from 74% to 84.6%. But, we’re not done. Trading is about precision, and our next gut check is to put in a stop loss.

DOING EVEN BETTER
We run the same test, using monthly options, but this time we put in a stop loss at 100% for the trade. Remember, selling a put spread can lose much more than 100% while it can only gain a maximum of 100%, so what we’re doing here is evening our our profit and loss distribution curve.

Here’s the setting we put in:

 

And here are the results:

 

The return jumps to 120% and we have actually reduced the risk of the trade by putting in a stop loss. This is trading, friends. Now it’s your turn.

What Just Happened
This is how people profit from the option market — it’s preparation, not luck. But even more, this was just one small example, now it’s time to find your own edge with your own ideas.

 

Published 3-9-2017

Netflix
To win at options we need to know:

* What to trade
* When to trade
* When to exit

 

With Netflix it turns out owning the 40 delta (slightly out of the money) calls, traded weekly for the last two-years returned 788%.

That’s the what and when. But, if we implement a stop loss at 70% (close the trade anytime it’s down 70%), that return goes to 877%. Here’s all of that in an image:

 

Yes, taking fully 30% less risk has actually pushed returns higher. That makes not just for a larger gain, but a risk reduction when the stock dips.

But other than looking at this and sort of thinking ‘OK, interesting,’ this doesn’t help that much for one reason — you didn’t find it yourself — it’s just a thing that you now know.

But now you can do this yourself, without any talking heads.

 

What Just Happened
This is it — the difference between the professionals and the amateurs. This is how people profit from the option market – it’s preparation, not luck.

 

Published 2-8-2017

Being Better is Possible
Being a better trader, a more profitable one, is possible. If you’re methodical, and patient there’s a good chance you will find opportunities that others will not.

This is one of those glaring cases where the vast majority of people likely missed this trade — and they likely missed it badly.You will not.

 

For those that are bullish on Facebook, a reasonable approach would be to buy the at the money (50 delta) calls. Here’s how that trade has done over the last two-years, using weekly options:

The set-up takes two mouse clicks:

 

And then the results:

 

Given the reality that the stock is up 80% in the last two-years, this long call strategy, which is certainly riskier than just owning stock, has failed. This is where most traders stop — they either employed a strategy with a ton of risk for far worse returns than the stock and simply turned away from the trade.

You will not be the average trader.

 

If we take that exact same strategy but now put a stop loss on the long calls at 70%, then all of a sudden a terrible approach turns into a great one.

The set up takes the click of one button:

 

And the results:

 

Yes — taking less risk by limiting our loss to 70% in any given week has turned a 28% return into a 145% return. With a stock rise of 80%, we have literally gone from an obviously bad strategy to an obviously good one.

But, now we have to look at the shorter-term. Let’s examine this approach, side-by-side, for the last six-months. The left side shows the results of buying weekly calls with no limit, and the right hand side shows the results if a 70% stop loss was employed:

 

In the last six-months Facebook stock is up 7%. The long calls were down 1%, but the long calls with a stop loss were up 23%, more than tripling the stock.

What Just Happened
This is it — the difference between the professionals and the amateurs. This is how people profit from the option market – it’s preparation, not luck.

 

 

Published on 3-5-2017
LEDE
While Apple is at all-time highs, it turns out that a bet on the stock rising isn’t nearly as interesting as a bet that the stock simply doesn’t “go down a lot.”

PREFACE
Selling a put spread in Apple Inc over the last two-years has looked like a loser — a bad one. In fact, here’s exactly how trading weekly options would have looked if we sold an out of the money put spread for the last two-years.

First the set-up:

 

And now the results:

 

That’s a -21.3% return over two-years while Apple Inc stock is actually up. Now, this is where the vast majority of traders stop — and this is where you will not.

Let’s next take that same Apple Inc strategy, but avoid the risk of earnings — that is, we simply close the position two-days before earnings, and re-open it two-days after earnings. Here is the set-up — just tap a button.

 

And here are the results:

 

The return is still negative, but it’s now at -10% from -21%, and we have actually taken less risk to get better returns.

But there’s more — and this where we find the truth in option trading. When selling a put spread the maximum gain is 100% but the loss could have a maximum of much worse than 100%. Let’s establish a trading rule to remedy that — we” put a stop loss at 100% so no trade in any given week gets out of control.

Here’s the setup:

 

And then the results for Apple Inc (NASDAQ:AAPL):

 

It might seem odd, but we have now taken two risk-off moves — avoiding earnings and implementing a stop loss, but with less risk we have found vastly better returns. Yes, we went from a 21% negative return to a 68% positive return. How many traders see this trade? Whatever the number, it’s small — and now you are one of them.

Just to make sure we’re not “cherry picking” a good timing of the trade, here’s how that short spread did avoiding Apple Inc (NASDAQ:AAPL) earnings, with a stop loss over the last year.

 

What Just Happened
This is how people profit from the option market — it’s preparation, not luck. But even more, this was just one example, now it’s time to find your own edge.


 

Published: 2017-04-20
LEDE
In a bull market, selling puts or put spreads is generally a good bet and that is the case with Tesla Inc (NASDAQ:TSLA), but using the dynamics of the stock to our favor has created an option winner with superior returns and less risk.

PREFACE
Tesla Inc (NASDAQ:TSLA) has unique stock dynamics. Here is a three year stock chart via Yahoo! Finance:

 

What we can see is that the stock drops abruptly quite often, but also recovers equally abruptly and equally as often. This means there are two critical elements to trading options in Tesla Inc we need to address. The first is a stop loss — but this alone will not be good enough. Let’s take step one, and see the results.

These are the results of selling an out of the money put in Tesla Inc every 60-days:

 

That’s a 51.9% return while the stock was up 49.5%. That is a ton of risk for not very much additional return. Now, we can address the risk by putting a stop loss in, like this:

 

What we have done is employed a risk reduction strategy which attempts to limit the downside of a short put gone wrong. While a short put can lose several hundred percent of the actual credit received, we have limited that loss 100%. For example, if we sold a put @$1.00, if it hits $2.00, we would buy it back and end the trade.

Now here’s the key: after the stop loss is triggered, in this example, we would the remaining days of that option, and only after the 60 days we would sell a put again. Here are the results:

 

Unfortunately, employing that stop loss has turned a 51.9% winner into a 2.2% loser. But, that stop loss has only taken into account one of the two realities surrounding Tesla Inc’s (NASDAQ:TSLA) stock dynamics. We have limited the downside, but we have not addressed the abrupt recoveries. Here’s how we take care of both stock dynamics:

 

It’s subtle, but we have selected “Immediately” for our “Open Next Trade” rules. In English, in this test, when the stop loss is triggered, we buy back the losing put, but immediately sell the new near the money put at the same time. Here are the results:

 

The left hand side shows that this “immediate trade stop loss” returned 92.7% versus the normal short put, which returned 51.9% and the prior stop loss implementation, which waited the full 60 days to trade again, of a 2.2% loss.

We have addressed the reality that Tesla Inc can move down abruptly by using a stop loss, but we have further refined the strategy to open the next short put “immediately” to benefit from Tesla’s other stock dynamic — abrupt reversals.

OVER TIME
This idea has worked over time, not just over three-years. Here is the result of normal short put trading versus the stop loss with immediate re-entry over two-years:

 

We see a 5.4% gain, with a ton of risk, turn into a 42.2% gain with less risk due to the stop loss. That’s nearly a 9-fold return with less risk. And all we have done is take what we can plainly see in the stock chart, and turn that into a trading plan.

Here is how this stop with “immediate re-open” has done over the last year:

 

WHAT JUST HAPPENED
Options are derivatives — which simply means their underling price is derived from the stock price. It makes sense, then, that our option strategy accounts for the stock’s dynamics.

This is how people profit from the option market — it’s preparation, not luck.

 

Published on 2-7-2017

Intel, Short Puts and Stop Losses
Selling a put during a bull market is one of the best performing trades. Do it in a large cap that doesn’t have any real ‘black swan’ stop drops and it’s likely even better. But that is what everyone else knows — and this is what they do not.

If we look at selling the 25 delta (out of the money) put in Intel every week for three-years we got these results:

 

Yep, an 8.8% loss, even though we are in the middle of a bull market and Intel is a pretty low risk tech stock.

Everyone else who has looked at this strategy has walked away believing it’s a loser — and that’s great because that means those of us using less luck and more analysis have a window of opportunity.

 

Here is how that exact same strategy looked, but we used a 50% stop loss — that is, every time the weekly option hit a 50% loss, we simply closed it, and waited for the next week to trade.

 

Yeah, that’s not a typo. An 8.8% losing trade turned into a 105% winning trade by using stops appropriately.

 

And this isn’t cherry picking. If we did this same side-by-side comparison for short puts in Intel for two-years using weekly options, we got these results:

 

What was a 15% losing trade to most of the world, was in fact a 54% winning trade to those using proper stops.

 

But this article actually isn’t about evangelizing the use of stop losses — not at all. This article is a window into the world of successful option trading. This is why…

 

Published 3-2-2017
PREFACE
Apple Inc (NASDAQ:AAPL) Inc has been on an historic run of late much to the dismay of the doubters on Wall Street, and there is an exceptional way to use options to profit from the run.

Apple Inc Stock Tendencies
Buying an at-the-money call (also known as a 50 delta call) is a bullish stance on a stock, but the real secret behind successful option strategies is found in the nooks and crannies of the trade. Let’s take a look. First, here is how buying a 50 delta call every week for the last 2-years has done.

 

This strategy has returned 53.2% in the last two-years while the stock has risen just 12%. But this is not the end of the analysis — it’s the beginning. The strategy we just looked at must be improved upon, and we start by addressing the risk.

A smart approach to optimizing the reality of Apple’s stock dynamics is to let the winners run, but cut the losing calls off early. We can do this by putting in a stop loss. While a long call can lose 100% of its value, what we can do is put in a rule:

In any week, if the call loses 50% of its value, let’s cut it off, and trade the next week. We are effectively removing half of the downside risk.

 

We can do this with the tap of the mouse:

 

And here are the results. We have put the old strategy on the right and the new, risk adjusted strategy, on the right:

 

We took that 53.2% return and nearly doubled it to an 89.8% return — but more importantly we substantially reduced the risk.

WHAT JUST HAPPENED?
Rather than just stare at numbers, we can look at exactly what’s going on with this risk adjusted implementation. Here is the return chart of both strategies, where the red line is the long call without a stop loss, and the blue line is the strategy with a stop loss.

 

What we can see is the incremental change we have imposed on the strategy. There was no magic bullet, but rather a systematic risk reduction based exactly on the dynamics of Apple’s stock price tendencies. Over time, the returns grew vastly better even though we took half the risk.

Now, if our analysis is correct, this stop loss implementation of owning calls should have worked better than the normal strategy of just buying and holding for all time periods.

It turns out that this is exactly what we find. Here are the results, side-by-side, for one-year:

 

With Apple’s new found rally, the returns are gigantic either way, but it’s not the big numbers that we are focusing on, rather it is the systematic adjustment to the strategy that took less risk and created more wealth.

Cut off the losers fast, let the winners run.

This intellectually smarter approach to Apple options is exactly what option professionals at institutions do. Little changes that over time create a difference between the trader in the know, and the casual trader.

What Just Happened
This is how people profit from the option market — it’s preparation, not luck. But even more, this was just one small example, now it’s time to find your own edge with your own ideas.

image

 

Published 02-27-2017

PREFACE
With the market at all-time highs there may be some discomfort in betting that the market will rise — but, given the immensely strong earnings in the mega caps like Facebook, Apple and Alphabet, perhaps the best bet is to simply position ourselves to profit from the stocks not collapsing.

It turns out we can do that, and it has worked very well.

 

BASIS
What we’re about to look at could feel uncomfortable, not in that it’s difficult, but rather that it’s this simple and this important — a glaring example of how the top 0.1% have been dissecting retail traders for decades. But it’s objective data — this is how option professionals find the edge they require to keep going.

FACEBOOK
Facebook turned in blowout earnings last quarter, so there is reason to believe that in might have found a strong base. Now, here’s what we can do.

Selling an out of the money put spread is essentially a bet that a stock won’t go down a lot. The questions become:

(1) Does it make a large profit?
(2) When do we do it?
(3) How do we limit risk.?

All of those questions have magnificent answers when we are clever. Here go.

SHORT PUT SPREAD
If we sold an out of the money put spread in Facebook over the last three-years, every week, these were our results:

image

 

We can see a 348% return with 115 winning trades and 41 losing trades, or a 73.7% win-rate. We have proven the idea – but now we need to adjust for risk.

Next, we can look at how this exact same strategy did, but we can avoid earnings. That is, never hold any option position during earnings — just skip it altogether.

image

 

We can see that the return has risen from 348% to 366%, but that misses the point. We have just taken a massive amount of risk out of this strategy, and we see better returns. But, there’s more we can do.

Let’s turn to a six-month test of this strategy, first looking at avoiding earnings (left) versus earnings (right):

image

 

Focusing on the short-term results we can explicitly see how dangerous earnings have been, and how much risk we save by avoiding it. But there’s one last step for the highly intelligent trader.

Selling a put spread can carry a lot of risk — even if we avoid earnings. The loss on any given spread can actually be much larger than 100%. So, let’s explicitly cap the risk by putting in a stop loss at 200%.

image

 

All we’ve done is put a rule in that reads, if a certain put spread during the week hits a 200% loss, we just close it, and trade the next week — we do not hold a large losing position. Here are the results:

image

 

We can see a 107% gain in 6-months, and we have eliminated the risk of earnings, and capped our loss in any one week. Now we can answer rather explicitly:

Betting on a mega cap not going down has been very profitable, it can be adjusted to take less risk, and that risk reduced implementation has been even better.

What Just Happened
This is how people profit from the option market — it’s preparation, not luck. But even more, this was just one small example, now it’s time to find your own edge with your own ideas.


PREFACE: Trading Skyworks Solutions (NASDAQ:SWKS)

Skyworks Solutions is one of the tech marvels that will power the incredible data consumption trend coming in the next few years, out to several decades. While this is an option trading story, here’s just one example of the massive data consumption growth the world will see starting, basically, right now.

 

As the caption reads, “between 2016 and 2022, the traffic generated by smartphones will increase 10 times.” For more information on the real details behind the company, we recommend you check out CML Pro, here.

BACK TO OPTIONS
But let’s turn back to options. While it seems like a simple bullish option strategy would work, if we did so, we just fell into a trap. It’s the trap that likely 99% of traders fall into. We can look at how selling out of the money put spreads did in SWKS over the last three-years, rolling the trade every 30-days (monthly options). Here’s the set-up:

 

Now, what we also did, to take us beyond the obvious and in to the realm of finding edge, is we looked at selling these put spreads but avoiding earnings on the left and then simply ignoring earnings (doing nothing special) on the right:

 

Incredibly, we see that avoiding earnings, which is vastly less risky than holding during earnings, returned 79.8% compared to 37.6% if we just traded every 30-days and never paid any attention to earnings. Yep, we got better returns with less risk.

And the next step, of course, is to do this same analysis but look at the last year, to make sure we aren’t picking up an anomaly that worked three-years ago but has all but disappeared in the last year.

 

We see 59.3% returns in just one-year and avoiding earnings while the alternative, to simply trade every 30-days and just let earnings happen, returned 50%. While both numbers are huge, taking less risk with better returns is exactly what we’re after in trading, generally speaking.

What Just Happened
This is how people profit from the option market — it’s preparation, not luck. But even more, this was just one small example, now it’s time to find your own edge with your own ideas.


Published 2-4-2017

EDGE DISCOVERY
Since the ‘delta’ of an option is a proxy for the probability that it will expire in the money, we can explicitly examine and hunt for ‘edge.’ That is, we can explicitly examine and hunt for trades that win more often than the market is pricing in through the delta. When we find that opportunity, the results can be staggering.

An option with 30 delta should end in the money about 30% of the time, so selling it should end up a winner 70% of the time. Now, let’s examine the boring, reliable and absolutely beautiful option trading instrument — the famed Utilities ETF, ticker: XLU.

UTILITIES ETF: XLU
If we test selling a 30 delta put every 30-days in XLU over the last 3-years, this is the set-up:

 

And this is what we find:

 

We can see 34 winning trades with 5 losing trades. That’s an 87% win-rate on a 30-delta option that we would expect a 70% win-rate. Even more importantly, we see a 66.4% return over the last 3-years. But, if we go just one step further, we actually find even more edge.

We can do the exact same back-test, but this time, instead of trading 30-day options, we can test trading 60-day options over the same 3-year period. We just type in 60 days in the rollover entry:

And now, here are those results:

 

Now we see 19 winning trades and 2 losing trades for a 90.5% win-rate on an option that should only have a 70% win-rate, and even further, we see a 72.4% return. We have just seen an increased win rate, an increased return while reducing trading frequency — which means less commissions.

The next piece of analysis we need to look at is how this short put strategy every 60 days worked over the last year.

 

Obviously we’re looking at fewer trades, but here we see edge again. 7 winning trades and 1 losing trade for an 85% win-rate and a 32.6% return.

SO WHAT JUST HAPPENED?
In XLU, we see a higher win rate than the option market has priced in for short puts over the last three-years and the last year. The result is superior returns.

Now this process goes yet further — beyond the Utilities ETF and beyond just short out of the money puts to any ETF, any stock and over a dozen option strategies including covered calls.

 

This is an update to the original article as of 2-15-2017

The Trade That Keeps Working
The VXX is easily one of the most interesting instruments I have ever encountered as an option market maker physically on the NYSE ARCA floor and CBOE, remotely. It’s a bet on contango (or backwardation depending on your position) in the VIX and it has been just unimaginably consistent.

But, while the best keeps on working, the nature of the brief periods where it reverses means large losses can be sustained in a short-period, unless you’re prepared.

Understanding the risk profile of VXX has meant massively higher returns.

 

For the most part, the VXX just goes down all the time… Here is an all-time chart for VXX:

 

But here is that chart over the last two-years:

 

For obvious reasons, it has become one of the most crowded trades in the market — short and short and short again. But, we can also examine this instrument with options.

While buying puts seems like the obvious move, there is a slightly less risky approach — selling call spreads. With a spread, we hedge one option with another as opposed to a naked long (or short) position.

Here is what selling out of the money call spreads has done over the last 2-years, rolling every week (so trading weekly options)

 

That’s a 73% return with 83 winning trades and just 21 losing trades for a 79.8% win rate. Since delta is actually a proxy for probability, owning a 40 delta option should be in the money about 40% of time. And that means that selling it should work about 60% of the time. At 79.8%, we have edge.

But the times when the VXX rises are abrupt and can cause portfolio draw downs, even if over the long-term the short call spreads were winners.

Avoiding Large Drawdowns
It turns that as traders we have a tool for this behavior, and it’s called a stop loss. You see, a short call spread can only make 100% in a single trade, but it can lose far more than that. It does not have a symmetric profit loss profile.

But, if we cut those losses off at the knees and totally reconstruct our profit loss profile, we can actually erase a huge amount of risk and increase returns. Here’s what happens when we put a stop loss at 50% for the call spreads every week.

Here’s how we do it:

 

And now the results:

 

In English, if in any given week a call spread turns against us for a 50% loss, we buy it back and wait for the next week — not allowing that trade to get worse.

We see a 73% winner turn into a 126% winner and we took massively less risk by using a stop loss. While the win-rate has gone down, the returns have jumped higher.

In in the case of the VXX and its rare but abrupt sporadic up turns, this is a highly sophisticated, albeit very easy approach, way of dealing with this phenomenon.

Repeat This
The real analysis goes beyond just VXX — and into the SPY, and even individual stocks, like AAPL, FB, the mega banks and even NFLX or even through the lower risk industries with companies like SBUX and NKE.

For example, here is what a short put spread in SPY over the last two-years has done:

 

What Just Happened
This is how people profit from the option market — it’s preparation, not luck. But even more, this was just one small example, now it’s time to find your own edge with your own ideas.

 

It Matters
It’s incredible how much a little bit of edge can mean the difference between a losing string of trades and a winning streak. Here’s an explicit example.

Selling put spreads in high quality stocks — that is, stocks that don’t have ‘black swan’ risk, is largely a winner during a bull market, or even a stagnant market. But there’s a little secret that we simply cannot overlook — bull market or not, earnings dates are massively risky.

To make it concrete, selling out of the money put spreads in JP Morgan (JPM) during earnings over the last 3-years was a disaster, even though the stock is up:

 

That’s a 26.7% loss, even though the trade won 7 out of 12 times. You see, since delta is a measure of probability, a 30 delta option should be in the money 30% of the time, so selling it should have won 70% of the time. In this case we see a 58% win rate, which is below the 70% we should expect — and that means this trade has negative ‘edge.’

But, if we click a few buttons and did the exact same strategy but always avoided earnings, we got radically different results (using monthly options).

Set Up

 

And then the results:

Results

 

Now we see, for the same option strategy, over the same time period, that we went from a 26% loss to a 121% gain and our win rate went from 58% to 77%. Remember, anything over 70% for this put spread means we are extracting positive ‘edge’ out of the market — or in English, we are winning.

It took about 60 seconds to find this opportunity — and we can do it for any company or ETF just as easily and with just as much power. This is methodical option trading, finding positive edge and avoiding negative edge.

 

The Difference Between Winning and Losing
Vince Lombardi once said “Winning is habit. Unfortunately, so is losing.”

Selling put spreads in high quality stocks — that is, stocks that don’t have ‘black swan’ risk, is largely a winner during a bull market, or even a stagnant market. But there’s a little secret that we simply cannot overlook — bull market or not, earnings dates are massively risky.

To make it concrete, selling out of the money put spreads in Wells Fargo (WFC) during earnings over the last 3-years was a disaster, even though the stock is up:

 

But, if we click a few buttons and did the exact same strategy but always avoided earnings, we got radically different results (using monthly options).

Set Up

 

And then the results:

Results

 

That’s the same option strategy, over the same time period, that went from a 48% loser to an 65% winner. And, the time it took to find this opportunity, oh, about 60 seconds and 3 mouse clicks.

 

The Thin Line Between Winning and Losing
The Coca-Cola Co (NYSE:KO) is one of those blue chips that most of us give little thought to with respect to the stock or options. But it turns out, that little fact, that KO isn’t memorable as an investment, has made it one of the best option trading instruments in North America, but only if we use some intelligence.

In options speak, the goal is to benefit from low HV (times when the stock doesn’t move a lot) — but that means we also need to navigate low IV, when selling options.

This may sound incredible, but over the last three-years KO stock has traded no lower than $37 and no higher than $47. Yep, total stagnation. But, that stagnation has not resulted in good option trading during earnings. Check out the last three-years selling out of the money put spreads only during earnings:

 

It’s almost impossible to believe but selling out of the money put spreads during earnings lost as much as 84% when done every earnings period for three-years. But, that’s not the point of KO as an option trade — the point is the ‘dead times.’ Check out the exact same back-test of selling out of the money put spreads for the last three-years but always avoiding earnings.

 

The results are staggeringly different, and staggeringly good. In a stock that has been strangled by a tight trading range, once we remove the risk of earnings, we go from a 13% gain in stock price to 35% to 71% gain in options. But, this isn’t cherry picking. We can do the exact same test again, but this time looking over a two-year period and avoiding earnings:

 

Again we see giant returns for a dead stock — crossing over 70% returns as long as we avoided earnings. For completeness we show the one-year back-test ex-earnings in KO:

 

It’s like a record on repeat — it’s a winner when we avoid earnings in KO and sell out of the money put spreads. In fact, the stock is up 2.1% over the last year and we are looking at a risk controlled option strategy that yielded upwards of 80%.

We have identified the low HV periods (the times when the stock is calm) to sell options — irrespective of the fact that the implied volatility (IV), which can also be thought of simply as the price of the options, was also low.

What Just Happened
This is how people profit from the option market — it’s preparation, not luck. But even more, this was just one small example, now it’s time to find your own edge with your own ideas.

 

Published: 3-1-2017
PREFACE
It’s been under reported, but an important opportunity has emerged in Bank of America Corp (NYSE:BAC) options and the rest of the market may be missing it.

WHAT IS EDGE?
One of the great beauties of option trading is that the market prices the ‘greeks,’ which serve as a measure of probability.

If a trade wins more often than the probability that is priced in, it has edge.

 

Here is that same thought process, but in English: A 30 delta (out of the money) put should end up in-the-money about 30% of the time (delta is roughly a measure of probability). In other words, if we sold a 30 delta put, we would expect that we could have a winner 70% of the time.

EDGE
Now, back to our idea of edge. If we can find an option strategy that has a 30 delta, but if selling it wins more than 70% of the time, then we have edge. Even further, even if it wins ‘just’ 70% of the time, if the net profit is positive, then that’s another measure of edge.

When we have both, we have a great trading result, and that is exactly what we find with Bank of America Corp (NYSE:BAC).

 

Bank of America Corp (NYSE:BAC)
If we test selling a 30 delta put, every two-weeks in Bank of America Corp over the last 3-years, this is what we find:

 

This result is bad, but it gives us a window into how exactly to trade BAC options. We actually see an 84.6% win-rate, which is substantially superior to the 70% we expected. But, the returns are negative. Putting our detective hats on, what we are seeing here is that the few losing trades are having large negative returns.

Now that we have diagnosed the problem, we can address it. Let’s do this exact same strategy, but let’s avoid the risk of earnings. That is, we simply skip trading during earnings events. Here is the easy set-up — just a tap of the mouse:

 

And here are the results, now that earnings are avoided:

 

By taking less risk, we have turned a losing strategy into a winner, while maintaining a very high percentage of winning trades. But the real opportunity here is not what has happened 3-years ago, it’s the overwhelmingly bullish sentiment for banks that is happening right now.

This is how that same short put strategy, while avoiding the risk of earnings, has done over the last 6-months:

 

Over the last 6-months, there have been 12 two-week trading windows if we avoid earnings. Every single two-week period has produced a win with this short put, and the returns are over 50%. That is enormous edge and it’s growing as the market looks to a rate hike and possible deregulation.

Betting on a mega cap not going down has been very profitable, it can be adjusted to take less risk, and that risk reduced implementation has been even better.

What Just Happened
This is how people profit from the option market — it’s preparation, not luck. But even more, this was just one small example, now it’s time to find your own edge with your own ideas.


Pubished in early January 2017
Apple Earnings Vol
It’s one of the great questions in option trading — whether to buy or sell options during an earnings release. It appears there may be systematic mis-pricing in Apple’s volatility. Let’s take a look.

We have been in an historically low volatility environment for several years and with that we have seen implied vols come down as well. Let’s turn to Apple, and see what owning options has meant during earnings releases.

We test a three-year strategy of owning out of the money iron condors in Apple but only held during earnings. Here are the results:

 

And for context, here is the return of that strategy versus the stock itself:

 

Those are staggeringly high results considering that option strategy had a total holding period of just a few weeks. The results are large enough that we need to dig deeper into what’s going on.

Let’s look at this same strategy, but use no special trading rules. That is, we will look at 3-years of owning monthly out of the money condors for Apple, including earnings and all other times well:

 

Now we can see that generally owning vol in Apple has been a loser. This is the phenomenon we discussed at the top — historically low volatility for several years. Before we get too excited about owning earnings vol in Apple (which is very risky even though it is long options), let’s look at the results of that strategy over just the last year:

 

So we can see some consistency here. Owning the earnings vol in Apple over three-years or just one-year has been a big winner, albeit very risky. And, just to add a little more fuel to this argument, we can also look at a one-year back-test of owning out of the money condors in Apple over the last-year during all periods — i.e. not just earnings:

 

So, we have come to a thesis, or at least a standing hypothesis: The depressed implied volatility pricing in Apple options appears to be a slight mis-pricing. Owning the out of the money condors in Apple during earnings has been a winner for one-year and three-years, and even just owning those same condors at all times (rolling every 30-days) over the last year has been a winner.

This is what a vol discrepancy looks like and it takes a nice tool to identify it. So let’s go even further, and talk more generally.

What Just Happened
This is how people profit from the option market — it’s preparation, not luck. But even more, this was just one small example, now it’s time to find your own edge with your own ideas.


How to Trade earnings Vol in Netflix
It’s one of the great questions in option trading — whether to buy or sell options during an earnings release. For stocks that gap up or down, owning the options is a winner. For the stocks that tend to be rather quiet, it could be that selling options is the winner.

The results for Netflix over the last three-years and one-year are rather staggering. First we tested a three-year window, owning out of the money condors only during earnings. Here are the results:

 

Those are absurd results — looking at 300% returns buy owning the volatility. Before we dive deeper, we can just see the shocks in the stock and the impact it had on the condors in the chart below. The yellow highlighted line follows the profitability of the long condors where the gray line is the stock.

 

The next real question is whether or not this was a phenomenon that simply worked several years ago and was muted, or even a loser, over the last year. Here is the result of that back-test:

 

We can see that even if hyper focus on the last four earnings results, owning the vol in Netflix has been a winner during earnings. It wasn’t a winner every time, but over several events, it was rather successful. Now we can broaden our conversation out beyond Netflix, condors and earnings.

 

 

Risk Controls and Beating the Market
We can take a rather simple and fast look at Alphabet Inc (NASDAQ:GOOGL). Let’s just test a simple idea: Selling out of the money put spreads every 30-days. Here are the results:

 

We can see a rather large 102% to 128% return depending on the exact put spreads we sold. And, of course, to make this relevant, we need the perspective of the stock performance during the last three-years. Here is the chart that plots the short put spreads in the yellow highlighted lines and the stock price in the gray line:

 

We’re looking at option strategies that essentially benefited from Alphabet not having any ‘black swan’ stock drops to return over 100% while the stock rose ‘just’ 43%. We find similar results with Apple (AAPL), IBM, Qualcomm (QCOM) and even the S&P 500 (SPY).

What Just Happened
This is how people profit from the option market — it’s preparation, not luck. But even more, this was just one small example, now it’s time to find your own edge with your own ideas.

 

Date Published: 2017-03-06
PREFACE
Selling a covered call in Apple Inc (NASDAQ:AAPL) has been a winner, but only for the mindful investor that avoids the pitfalls and is mindful of risk.

Apple Stock Tendencies
Doing a covered call against a long stock position can be a wonderful income producing strategy, but it can also be very risky when done without proper understanding of the stock dynamics. Make no mistake, a covered call can be wealth destructive.

Here’s what selling a covered call every month for the last two-years has returned in Apple Inc (NASDAQ:AAPL).

 

The covered call strategy returned 13.4% over the last two-years, which is decent, but hardly a breakthrough. But there’s something going on with Apple Inc (NASDAQ:AAPL) stock that is not easily seen without the right tools.

This is how the covered call has done if held only during earnings.

 

It may come as a surprise, but a covered call held during earnings has been a loser. While that appears like a non-starter, it’s actually the opposite — it’s the exact dynamic we needed to know to make this strategy work.

Here is how that same covered call has worked for the last 2-years, if it was held at all times, but then we simply skipped earnings — we held no position. For ease of comparison, if have put the original strategy on the left, and the new one — skipping earnings — on the right.

 

That 13.4% return has spiked t0 22.4%, and even better, this strategy took far less risk than doing the covered call blindly every month.

The key to option trading is quite simple — understanding the dynamics of the stock you’re looking at allows you to adjust the option strategy to reflect those dynamics.

 

We can make this adjustment the tap of the mouse button:

 

IS THIS JUST LUCK?
If our analysis is correct, this strategy of avoiding earnings for the covered call in Apple Inc should have worked better than the normal strategy of just selling the covered call and holding for the near-term as well.

It turns out that this is exactly what we find. Here are the results, side-by-side, for the last year:

 

The left had side shows the results of holding the covered call at all times during the last year, and the right hand side shows the results of doing the same, but always avoiding earnings. It’s not just the better returns we are after, it’s avoiding the outsized risk of earnings — when an option position feels like the flip of a coin rather than investment.

What Just Happened
This is how people profit from the option market — it’s preparation, not luck. But even more, this was just one small example, now it’s time to find your own edge with your own ideas.


PREFACE
The most successful option trading is not about guessing. Here is the power of a calm option strategy that crushed the market over the last 6-months, 1-year, 2-years and 3-years. And it wasn’t even close. Even better, here’s how it can be replicated.

STORY: BEATING THE MARKET
There’s a lot less luck in successful option trading than many people realize and this is the evidence.

Selling puts during a bull market is likely the most profitable strategy to employ, but it has a drawback, namely, it’s naked short an option. A risk managed version of this trade is to sell a put spread, rather than a naked put.

But don’t mistake calm for poor results — this is huge.

First we look at a back-test using the SPY ETF as our proxy for the S&P 500. We keep it simple:

* Sell out of the money put spreads
* Do it monthly
* Test it for 3-years

Here is the set-up — it’s basically requires clicking three buttons:

 

And now the results:

 

Selling a put spread every month for 3-years generated anywhere from 54% to 103%, depending on the amount of risk taken. Here is how the middle strategy did versus the S&P 500 over three-years:

 

That’s 78% for the short put spreads versus 31% for the S&P 500.

That seems easy enough, but the next question is whether or not this is ‘cherry picking’ a particularly good time frame and set of options. The answer is no. This is a methodological result. Here are the results for those exact same put spreads for the last 2-years, 1-year and even the last 6-months, respectively.

Last 2-years

 

Last 1-year

 

Last 6-months

 

The time period didn’t matter. Selling risk protected put spreads in SPY would have so outperformed the index that it generated decades worth of capital appreciation in a matter of a couple of years. Finding the results was as easy as clicking these buttons:

 

CONCLUSION
The use and testing of historical data is the life blood of the most sophisticated hedge funds. If you’re wondering if this strategy worked for stocks and not just SPY, the answer is a resounding, yes. We cover that below.


 

STORY: BEATING THE MARKET
There’s a lot less luck in successful option trading than many people realize and this is the evidence. We’ll look at CSCO and IBM in this example, but then broaden it out at the end.

Selling puts during a bull market is likely the most profitable strategy to employ. But don’t mistake calm for stale results. We’ll look at the simplest back-test possible:

* Sell out of the money puts
* Do it monthly
* Test it for 2-years

And now the results:

 

Selling out of the money puts in Cisco (CSCO) has returned anywhere from 52% to 59%. And of course, none of this is relevant without a comparison to the stock. Here’s a chart of the out of the money short put in blue (highlighted in yellow) versus the stock in gray.

 

This is how we take a calm, low risk stock and turn it into a winner. In fact, if we did this with IBM, AAPL, and QCOM, and even went a step further, but sold puts and always avoided earnings by buying the put back before the earnings release and then selling two-days after, we got even better results.

Here is what IBM looked like if we sold put spreads and avoided earnings:

 

Yep, that’s 102% versus a stock rise of 11%. There are a lot of these little gems that are low risk instruments, especially when we avoid earnings, that when put into a portfolio of option trades supercharge a normal stock portfolio into massive out performance.

What Just Happened
This is how people profit from the option market — it’s preparation, not luck. But even more, this was just one small example, now it’s time to find your own edge with your own ideas.


There’s a lot less ‘luck’ and a lot more planning in successful option trading than many people know. But it’s not about trying to guess which stocks will go up or down.

Here is a video demonstration of the CMLviz Option Back-tester. This video will change your view of what an ‘options expert’ is and then shape your view of trading for the better, forever.

Below this video is yet a more powerful video which uncovers the entire engine behind the CML Trade Machine™ Pro, that every professional option trader would rather that you don’t see.

You can see historical performance in two clicks. No installing software, no purchasing data. Build your own strategy or browse best performers.
AVOID THE RISK OF A BEAR MARKET
The option trades and scanning engine that every professional option trader would rather that you don’t see.

WHAT MEMBERS ALSO GET
We also share the great set-ups we find once a week. Stocks like BAC, AAPL, and NFLX that we mentioned at the top of the video, as well as ETFs like SPY, XLU and even the famed VXX.

You will get 3-10 new trade analyses, set-ups and ideas that are meant to further your knowledge of trading and keep you apprised of what’s happening in the market — from the mega cap tech stocks, to utilities, industrials, ETFs and indices. In fact, in your welcome email when you join, you will receive more than a dozen trade set-ups.

Who is CML?

We are Capital Market Laboratories. Our research sits next to Goldman Sachs, JP Morgan, Barclays, Morgan Stanley and every other multi billion dollar institution as a member of the famed Thomson Reuters First Call. But while those people pay upwards of $2,000 a month on their live terminals, we are the anti-institution and are breaking the information asymmetry.

Meet the team

 

 

By signing up through the form below, you agree to be billed $69/mo for access to CML TradeMachine™ Pro — you can cancel any time and will not be billed the following month. You also agree to the following: Terms of Service

CML TradeMachine™ Pro Sign Up

 


Richer, Deeper, Insights

Find out how your trading ideas would have worked in the real market, using a wide range of option strategies with unlimited flexibility:

  • Test multiple strategies against years of market data in just seconds
  • Calls, Puts, Straddles, Spreads, and much more
  • Customizable deltas, option rollover timing, commissions

Don’t trade in the dark. Get CML TradeMachine now. –>

Get CML TradeMachine

 

 

 

By signing up through the form below, you agree to be billed $69/mo for access to CML TradeMachine Pro — you can cancel any time and will not be billed the following month. You also agree to the following: Terms of Service

Sign up now to lock in the lifetime $69 / mo rate, before the promotion expires

CML TradeMachine Sign Up

Contact
Capital Market Laboratories
Phone: 310.479.4923
E-mail: support@cmlviz.com