The 5-Day Pre-earnings Momentum in Analog Devices

 

 

Analog Devices Inc (NASDAQ:ADI)

Date Published:

2017-11-6

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

There is a bullish momentum pattern in Analog Devices Inc (NASDAQ:ADI) stock 5 trading days before earnings, and we can capture that phenomenon explicitly by looking at returns in the option market.

ADI has earnings due out on 11-21-2017 before the market opens according to our data provider Wall Street Horizon. 5-trading days before than would be 11-14-2017.

THE COMPANY

ADI is another tech company that has seen incredible bullish movement in its stock over the last two-years. The company has found love from Wall Street because it is considered one the ways to ride the rapid growth in electric vehicles (EVs) as its battery management products are critical to the functioning of EVs. It’s also relies heavily on Apple as one of its suppliers, and we just saw Apple crush earnings and raise estimates.

Here is the 2-year stock chart:

Trade Discovery

We found ADI looking at the S&P 500 and the 7-day pre-earnings long call momentum scan:

Here are the results:

We then changed the earnings timing from 7-days to 5-days, as we attempted to fine tune the back-test and did find substantially better timing, historically for this set-up.

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 Analog Devices Inc.

The Bullish Option Trade Before Earnings in Analog Devices Inc

We will examine the outcome of getting long a weekly call option in Analog Devices Inc 5 trading days days 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.

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 three-years in Analog Devices Inc:

ADI: Long 40 Delta Call
% Wins: 92%
Wins:
11
Losses:
1
% Return:  263% 

Tap Here to See the Back-test

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 263% return, testing this over the last 12 earnings dates in Analog Devices Inc. That’s a total of just 60 days (5-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.

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 263%, the trade details keep us in bounds with expectations:

The average percent return per trade was 32.1% over a 5-trading day period.

The average percent return per winning trade was 42.1% over a 5-trading day period.

The percent return for the losing trade was -77.7% over a 5-trading day period.

Note the size of that one losing trade — there is risk to this back-test.

Back-testing More Time Periods in Analog Devices Inc

Now we can look at just the last year as well:

ADI: Long 40 Delta Call
% Wins: 100%
Wins:
4
Losses:
0
% Return:  146% 

Tap Here to See the Back-test

 

We’re now looking at 146% returns.

The average percent return over the last year per trade was 34.1% over a 5-trading day period..

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.


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