Options Trading & Analysis

Right Now: The Volatility Trade After Earnings in NVIDIA


This is a slightly advanced option trade that bets on volatility for a period that starts one-day after NVIDIA Corporation (NASDAQ:NVDA) earnings and lasts for the 6 calendar days to follow, that has been a winner for the last 2 years. We note the use of strict risk controls in this analysis.


Nvidia has earnings due out today (8-10-2017) after the close. One day after earnings would be 8-11-2017.

NVIDIA Corporation (NASDAQ:NVDA) Earnings
Trading the bullish momentum pattern ahead of earnings with a long call and closing yesterday (one-day before earnings) turned out to be a nice winner -- Nvidia stock followed its pattern. Now we look at another strategy that owns options, but this time takes no direction bias.

In NVIDIA Corporation, irrespective of whether the earnings move was large or small, if we waited one-day after earnings and then bought a one-week straddle (using weekly options), the results were quite strong. This trade opens one-day after earnings were announced to try to find a stock that moves a lot after the earnings announcement.

Simply owning options after earnings, blindly, is likely not a good trade, but hand-picking the times and the stocks to do it in can be useful. We can test this approach without bias with a custom option back-test. Here is the timing set-up around earnings:



Rules
* Open the long straddle one-calendar day after earnings.
* Close the straddle 7 calendar days after earnings.
* Use the options closest to 7 days from expiration (but at least 7-days).

This is a straight down the middle volatility bet -- this trade wins if the stock is volatile the week following earnings and it will stand to lose if the stock is not volatile. This is not a silver bullet -- it's a trade that needs to be carefully examined.

But, this is a stock direction neutral strategy, which is to say, it wins if the stock moves up or down -- it just has to move.

RISK CONTROL
Since blindly owning volatility can be a quick way to lose in the option market, we will apply a tight risk control to this analysis as well. We will add a 40% stop loss and a 40% limit gain.



In English, at the close of every trading day, if the straddle is up 40% from the price at the start of the trade, it gets sold for a profit. If it is down 40%, it gets sold for a loss. This also has the benefit of taking profits if there is volatility early in the week rather than waiting to close 7-days later.

RESULTS
If we bought the straddle in NVIDIA Corporation (NASDAQ:NVDA) over the last two-years but only held it after earnings we get these results:

NVDA: Long Straddle
 
% Wins: 71%
 
Wins: 5   Losses: 2
 
% Return:  167.7% 


We see a 167.7% return, testing this over the last 7 earnings dates in NVIDIA Corporation. That's a total of just 42 days (6 days for each earnings date, over 7 earnings dates). That's an annualized rate of 1,457%.

Looking at Averages
The overall return was 167.7%; but the trade statistics tell us more with average trade results:
      The average return per trade was 21.06% over 6-days.
      The average return per winning trade was 40.69% over 6-days.
      The average return per losing trade was -28.02% over 6-days.

Looking at the Last Year
While we just looked at a multi-year back-test, we can also hone in on the most recent year with the same test:

NVDA: Long Straddle
 
% Wins: 75%
 
Wins: 3   Losses: 1
 
% Return:  126% 


Now we see a 126% return over the last year and a 75% win-rate.

      The average return for the last year per trade was 23.99% over 6-days.
      The average return for the last year per winning trade was 46.66% over 6-days.
      The average return per losing trade was -43.99% over 6-days.

An Alternative
For the the more advanced option trader, a similar approach to this strategy would be to sell a strangle around this straddle turning it into an iron butterfly.

WHAT HAPPENED
This is it -- this is how people profit from the option market -- finding trading opportunities that avoid earnings risk and work equally well during a bull or bear market.

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.


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About Ophir Gottlieb


Mr. Gottlieb writes financial news for CML and also as a contributor to Yahoo! Finance, CNN Money, MSN Money, and before then for Marketwatch, Business Insider, TheStreet and Real Money. He has become a staple in financial TV, often times seen on the Business News Network and CBC. Mr. Gottlieb's experience includes working as an option market maker on the NYSE ARCA exchange floor (CBOE remotely), as Managing Director of Client Services and Algorithmic Trading for Livevol, Inc, and as the Managing Director and Product Manager of Quantitative Research for GMI (now MSCI). Ophir Gottlieb is inventor of the Forensic Alpha Model (FAM) and a co-inventor of Accounting and Governance Risk Model, both purchased by MSCI. FAM has been a celebrated achievement in artificial intelligence and quantitative finance that was introduced to world by the Rotman International Journal upon its completion. Mr Gottlieb's mathematics, measure theory and machine learning background stems from his graduate work at Stanford University and his time as an option market maker on the NYSE and CBOE exchange floors. He has been cited by various financial media including Reuters, Bloomberg, Wall St. Journal, Dow Jones Newswire and through re-publications in Barron's, Forbes, SF Chronicle, Chicago Tribune and Miami Herald and is often seen on financial television.

Author's web site: http://bit.ly/2mnZAmV


View Ophir Gottlieb's post archive >

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Get into peak options trading shape.

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Options Insider Special Events

Compelling panel & special event recordings from the options world.

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OIC's Wide World of Options

A dynamic mix of current events, investor resources, & strategy insights.

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Trading Tech Talk

We break down all the amazing technology that takes your trades from the click of a mouse to the clearinghouse.

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Options Playbook Radio

Break down cutting-edge options strategies and learn how to incorporate them into your portfolio

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We track all the unusual options trading activity on Options Oddities.

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