LEDE
Wells Fargo & Co (NYSE:WFC) has earnings due out on July 14, 2017 before the market opens. And, just like our prior dossier on JPMorgan, the real opportunity with options isn’t earnings – it’s right after earnings – and we see a trade that has won three straight years without a loss, returning 154%.
The Trade After Earnings
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 Wells Fargo & Co(NYSE:WFC) but also for JPMorgan, where it has won for three straight years without a loss.
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:
| WFC: Short 40/20 Delta Put Spread | |||
| | |||
| % Wins: | 100% | ||
| Wins: 11 | Losses: 0 | ||
| % Return: | 154% | ||
Tap Here to See the Actual Back-test
We see a 154% winner that only traded the month following earnings and took no risk at all other times. The trade has won all 11 of the last 11 earnings cycles times, or a 100% win-rate.
Here is how the strategy has done over the last year:
| WFC: Short 40/20 Delta Put Spread | |||
| | |||
| % Wins: | 100% | ||
| Wins: 4 | Losses: 0 | ||
| % Return: | 103% | ||
Tap Here to See the Actual Back-test
Now we a 103% return on just four full months of trading.
Here’s what we see over the last six-months:
| WFC: Short 40/20 Delta Put Spread | |||
| | |||
| % Wins: | 100% | ||
| Wins: 2 | Losses: 0 | ||
| % Return: | 44.3% | ||
Tap Here to See the Actual Back-test
Now we see a 44.3% 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):