The Real Opportunity in Tesla is After Earnings

[Guest]

 

For Option Traders, The Real Opportunity in Tesla Inc is After Earnings

 

Date Published: 2017-05-03 
Written by Ophir Gottlieb 

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 after testing using the 30-day options (monthly option) and we are simply selling an out of the money put spread. To be clear, this is bet that, after the big earnings move, when the price finds an equilibrium, for the 30-days following, a bet that the sock "won't go down a lot," has been a big winner. 

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 an 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. There is another approach to Tesla Inc before earnings, that we discussed a few days ago. 

This is how people profit from the option market -- it's preparation, not luck. Take an idea, test it over several periods, note the robustness of the results, and apply lessons learned. 

To see how to do this for any stock and for any strategy with just the click of a few buttons, 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 has no position in Tesla Inc (NASDAQ:TSLA) as of this writing. 

Back-test Link

 

 

 

 

 

Edited May 3, 2017 by Ophir Gottlieb

[Guest]

someone trying this?

[Guest]

This makes a ton of sense to me.  I suspect pre-screening this one to enter only after a positive earnings event would be even better.

[Guest]

31 minutes ago, Darcy MacDonald said:

This makes a ton of sense to me.  I suspect pre-screening this one to enter only after a positive earnings event would be even better.

TSLA only beats 33% of the time so this would significantly reduce trading opportunities.  Also, the decrease in the stock price during the session after a miss also works to help this strategy in the following 30 days. 

[Guest]

1 hour ago, SBatch said:

TSLA only beats 33% of the time so this would significantly reduce trading opportunities.  Also, the decrease in the stock price during the session after a miss also works to help this strategy in the following 30 days. 

Yeah, but I think you could broaden the idea to other stocks.  

I'm very uncomfortable with the idea of a systematic trade that "works" on just one stock.  The chance that the backtest is just curve-fitting is extremely high.  But if there's an underlying thesis that makes sense and works across many stocks with a given characteristic, then I think there's an opportunity. 

[Guest]

56 minutes ago, Darcy MacDonald said:

Yeah, but I think you could broaden the idea to other stocks.  

I'm very uncomfortable with the idea of a systematic trade that "works" on just one stock.  The chance that the backtest is just curve-fitting is extremely high.  But if there's an underlying thesis that makes sense and works across many stocks with a given characteristic, then I think there's an opportunity. 

For a back-test to fall victim to curve fitting it would need to have way more variables than this strategy.  Here the strategy is the stock and how it reacts for thirty days after its earnings release (regardless of its quarterly results).  There is no place where curve fitting can be introduced, everything is static.  It definitely can be applied to other stocks, it's just a matter of finding them.  I use http://stocksearning.com/ to locate stocks that have consistent 7 day trends after earnings and then they can be back-tested in the Trade Machine to determine if the trend holds for 30 days.  I would imagine we could find 5 or so that we can use each earnings cycle.

[Guest]

This study uses strictly "short puts".

I ran similar backtests using "short put credit vertical" with different deltas and got very similar results.

Now, I'm trying to think of other inputs to play around with and try to tweak.

But, all of these results are very good.

Now it is on to other underlyings.

We could take this a LOT further and into the commodity arena.

Rather than "earnings" , there is, for example, a weekly Crude inventory report ( I forgot which day).

All kinds of "known/unknowns" ( commodity proxy for earnings) with "crop" reports for the grains...etc.

Oh, never mind, I forgot the Trade Machine dosn't have commodity back data.

Edited May 4, 2017 by cuegis

[Guest]

5 minutes ago, cuegis said:

This study uses strictly "short puts".

I ran similar backtests using "short put credit vertical" with different deltas and got very similar results.

Now, I'm trying to think of other inputs to play around with and try to tweak.

But, all of these results are very good.

Now it is on to other underlyings.

We could take this a LOT further and into the commodity arena.

Rather than "earnings" , there is, for example, a weekly Crude inventory report ( I forgot which day).

All kinds of "known/unknowns" with "crop" reports for the grains...etc.

Oh, never mind, I forgot the Trade Machine dosn't have commodity back data.

 

It appears to be a bull put credit spread, no?

Edited May 4, 2017 by SBatch

[Guest]

22 minutes ago, SBatch said:

 

It appears to be a bull put credit spread, no?

OOPS! My mistake!

[Guest]

14 hours ago, cuegis said:

OOPS! My mistake!

Took a look at this and don't like the risk reward.  Looking at the June Week 1 -280/+260 put spread for a $4.00 credit. Risking $1,600 to potentially gain $400 per contract.  Not in my wheelhouse.

Edited May 4, 2017 by SBatch

[Guest]

20 minutes ago, SBatch said:

Took a look at this and don't like the risk reward.  Looking at the June Week 1 -280/+260 put spread for a $4.00 credit. Risking $1,600 to potentially gain $400 per contract.  Not in my wheelhouse.

I didn't get a chance to go through each trade but, if this is among them, it is something I would never do!