Disclaimer
The results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.
PREFACE
We're going back to the well with Thor Industries Inc (NYSE:THO). We last wrote about the company and its pre-earnings bullish momentum on Sep 06, 2017, when we penned The One-Week Pre-earnings Momentum Trade With Options in Thor Industries Inc.
Here's how the pattern unfolded last quarter after that dossier:
After reviewing the results over the last two-years, including last quarter, we have made a small optimization. Here we go with the full story.
STORY
There is a bullish momentum pattern in Thor Industries Inc (NYSE:THO) stock 7 calendar days before earnings, and we can capture that phenomenon explicitly by looking at returns in the option market.
LOGIC
The logic behind the test is easy to understand -- 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 Thor Industries Inc.
The Bullish Option Trade Before Earnings in Thor Industries Inc
We will examine the outcome of getting long a weekly call option in Thor Industries Inc 7-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.
ADJUSTMENT
Since THO reports earnings after the market closes, that means we can stretch the back-test holding period right up to the day of earnings, and see what happens if the trade is closed at the end of the day, but still before the actual earnings announcement, unless a stop or a limit triggers an earlier exit, of course.
The next earnings date for THO is not yet confirmed, but we have an estimate of 11-27-2017 from our data provider Wall Street Horizon. It's incumbent upon everyone to wait for an exact earnings date when trying to examine this back-test moving forward -- so for now, we have a guideline, not a hard date.
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.
RESULTS
Here are the results over the last two-years in Thor Industries Inc:
The mechanics of the TradeMachine™ are that it uses end of day prices for every back-test entry and exit (every trigger).
We see a 309% return, testing this over the last 8 earnings dates in Thor Industries Inc. That's a total of just 56 days (7-days for each earnings date, over 8 earnings dates). This has been the results of following the trend of bullish sentiment into earnings while avoiding the actual earnings result.
The trade will lose sometimes, but over the most recent trading history, this momentum and optimism options trade has won ahead of earnings.
Setting Expectations
While this strategy had an overall return of 309%, the trade details keep us in bounds with expectations:
- The average percent return per trade was 35.6%.
Back-testing More Time Periods in Thor Industries Inc
Now we can look at just the last year as well:
We're now looking at 190% returns, on 4 winning trades and 0 losing trades.
- The average percent return over the last year per trade was 43.4%.
WHAT HAPPENED
Bull markets tend to create optimism, whether it's deserved or not. To see how to test this for any stock 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.