Date Published: 2017-07-09
Written by Ophir Gottlieb
LEDE
JPMorgan Chase & Co.(NYSE:JPM) has earnings due out on July 14, 2017 before the market opens. But, the real opportunity with options isn’t earnings – it’s right after earnings – and we see a trade that has won for three-straight years without a single loss, returning 167%.
The Trade After Earnings
Selling a put spread every month in a stock that is rising, in hindsight, obviously looks like a great idea. But, there is a lot of risk in that trade, namely, the risk of an abrupt stock drop and a market sell-off that takes all stocks with it. So, we want to reduce the risk while not affecting the returns.
One of our go to trade set-ups starts by asking the question if trading every month is worth it – is it profitable – is it worth the risk? There’s an action plan that measures this exactly, and the results are powerful not just for Red Hat Inc, but for JPMorgan Chase & Co.
Let’s test the idea of selling a put spread only in the month after earnings. Here’s what we mean:
Our idea here is that after earnings are reported, and after the stock does all of its gymnastics, up or down, that two-days following the earnings move and for the next month, the stock is then in a quiet period.
If it gapped down – that gap is over. If it beat earnings, the downside move is already likely muted. Here is the set-up:
More explicitly, the rules are:
Rules
* Open short put spread 2 calendar days after earnings.
* Close short put spread 30 calendar days later.
* Use the option that is closest to but greater than 35-days away from expiration.
And here are the results of implementing this much finer strategy over the last three-years:
| JPM: Short 35/10 Delta Put Spread | |||
| | |||
| % Wins: | 100% | ||
| Wins: 12 | Losses: 0 | ||
| % Return: | 167% | ||
Tap Here to See the Actual Back-test
We see a 167% winner that only traded the month following earnings and took no risk at all other times. The trade has won all 12 of the last 12 earnings cycles times, or a 100% win-rate.
Here is how the strategy has done over the last year:
| JPM: Short 35/10 Delta Put Spread | |||
| | |||
| % Wins: | 100% | ||
| Wins: 4 | Losses: 0 | ||
| % Return: | 69.3% | ||
Tap Here to See the Actual Back-test
Now we a 69.3% return on just four full months of trading.
Here’s what we see over the last six-months:
| JPM: Short 35/10 Delta Put Spread | |||
| | |||
| % Wins: | 100% | ||
| Wins: 2 | Losses: 0 | ||
| % Return: | 36.4% | ||
Tap Here to See the Actual Back-test
Now we see a 36.4% return over the last two earnings cycles, winning both times.
The results are incredibly consistent, so much so that we need to take a step back and still examine the potential pitfalls here.
NO GUARANTEES
There are no guarantees to this trade, but it does appear to a very high probability investment, but even as such, it does have some drawbacks. If we look at the trade six-months ago in this back-test, we actually tested this trade (January 2017):