PREFACE
Boeing Co (NYSE:BA) may be an industrial company, but its price has behaved like a momentum technology stock. Check out this two-year chart:
With that ride has come the same pre-earnings bullish sentiment that so many of the tech darlings have seen as well, like Nvidia, Microsoft and many others.. In fact, on 12-October-2017, we wrote Swing Trading Earnings Bullish Momentum With Options in Boeing Company.
That looked at a 3-day pre-earnings momentum trade, which based on the timing of BA earnings ended up essentially being an one day trade. But true to its pattern, it worked quite well:
So, with BA earnings due out 1-31-2018, before the market opens, it's time to revisit the back-test. We do note that we are now sending out directional and non-directional back-tests of interest in alternating sequences. Note the importance of diversification. This back-test, however, is a straight down the middle bullish review.
IDEA
We will examine the outcome of going long a slightly out of the money (40 delta) weekly call option in Boeing Co (NYSE:BA) just three trading days before earnings and selling the call one day before the actual news.
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.
This is a no holds barred short-term bullish swing trade with options and that's it. It's a bullish bet, so must be conscious of the delta risk. With earnings due out on 1-31-2018, which is a Wednesday, this turns into, again, a day back-test.
That is, opening the trade on Monday 1-29-2018 near the end of the day and closing it, for better or worse, at the end of trading on Tuesday 1-30-2018. Since BA reports before the market opens on the 1-31-2018, holding beyond 1-30-2018 is a totally different strategy -- that is, it is an earnings bet, not a momentum bet, and that is not what we are reviewing here.
RISK MANAGEMENT
We can add another layer of risk management to the back-test by instituting and 40% stop loss and a 40% limit gain. Here is that setting:
In English, at the close of each trading day we check to see if the long option is either up or down 40% relative to the open price. If it was, the trade was closed.
DISCOVERY
We found this patterned momentum from the Trade Machine Pro scanner, looking at the S&P500 and the "3-days Pre-earnings Long Call" scan.
And here are the scan results:
BACK-TEST RESULTS
Below we present the back-test stats over the last two-years in Boeing Co (NYSE:BA):
The mechanics of the TradeMachine™ are that it uses end of day prices for every back-test entry and exit (every trigger).
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 Boeing Co (NYSE:BA), but over the recent history, this bullish option trade has won ahead of earnings.
Setting Expectations
While this strategy has an overall return of 519%, the trade details keep us in bounds with expectations:
- The average percent return per trade was 61.6% over just two-days.
Looking at More Recent History
We did a multi-year back-test above, now we can look at just the last year:
We're now looking at 205% returns, on 4 winning trades and 0 losing trades.
- The average percent return over the last year per trade was 40.7%.
WHAT HAPPENED
Bull markets tend to create optimism, whether it's deserved or not. To see how to find the best performing historical momentum, technical analysis or non-directional trades for any stock using empirical results rather than guesses, we welcome you to watch this quick demonstration video:
Tap Here to See the Tools at Work
Risk Disclosure
You should read the Characteristics and Risks of Standardized Options.
Past performance is not an indication of future results.
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.
Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.
Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.
