Our long term followers know that buying premium into earnings is one of our favorite strategies. I wrote about the strategy in my Seeking Alpha article Exploiting Earnings Associated Rising Volatility. IV (Implied Volatility) usually increases sharply a few days before earnings, and the increase should compensate for the negative theta. We have been using this strategy in our SteadyOptions model portfolio with great success.
However, not all stocks are suitable for that strategy. Some stocks experience consistent pattern of losses when buying premium before earnings. For those stocks we are using some alternative strategies like calendars.
In one of my previous articles I described a study done by tastytrade, claiming that buying premium before earnings does not work. Let's leave aside the fact that the study was severely flawed and skewed by buying "future ATM straddle" which simply doesn't make sense (see the article for full details). Today I want to talk about the stocks they used in the study: TSLA, LNKD, NFLX, AAPL, GOOG.
Those stocks are among the worst candidates for a straddle. In fact, they are so bad that they became our best candidates for a calendar strategy (which is basically the opposite of a straddle strategy). Here are our results from trading those stocks in the recent cycles:
- TSLA: +28%, +31%, +37%, +26%, +26%, +23%
- LNKD: +30%, +5%, +40%, +33%
- NFLX: +10%, +20%, +30%, +16%, +30%, +32%, +18%
- GOOG: +33%, +33%, +50%, -7%, +26%
You read this right: 21 winners, only one small loser.
This cycle was no exception: all four trades were winners, with average gain of 25.2%.
I'm not sure if tastytrade used those stocks on purpose to reach the conclusion they wanted to reach, but the fact remains. To do a reliable study, it is not enough to take a random list of stocks and reach a conclusion that a strategy doesn't work.
At SteadyOptions we spend hundreds of hours of backtesting to find the best parameters for our trades:
- Which strategy is suitable for which stocks?
- When is the optimal time to enter?
- How to manage the position?
- When to take profits?
The results speak for themselves. We booked 147% ROI in 2014 and 32% ROI so far in 2015. All results are based on real trades, not some kind of hypothetical or backtested random study.
If you want to learn more how to use our profitable strategies and increase your odds: