After Earnings: The Option Trade in NVIDIA Corporation (NASDAQ:NVDA)
Date Published: 2017-05-09
Written by Ophir Gottlieb
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.
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.
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. This is how people profit from the option market -- it's preparation, not luck.
To see how to do this for any stock we welcome you to watch this quick demonstration video:
Tap Here to See the Tools at Work
Thanks for reading.
Risk Disclosure
You should read the Characteristics and Risks of Standardized Options.
Past performance is not an indication of future results.
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.
Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.
The author is long shares of NVIDIA Corporation (NASDAQ:NVDA) as of this writing.
Back-test Link