Capital Market Laboratories

About the Author Capital Market Laboratories

Ophir Gottlieb (CEO & Co-founder) — Ophir Gottlieb is the CEO & Co-founder of Capital Market Laboratories (CML). CML is a member of the famed Thomson First Call roster, but our purpose is to provide institutional research to all investors and break the information monopoly held by the top .1% You can follow his stock research, called CML Pro, here: http://bit.ly/TopPIcks You can use the option-backtester here: http://bit.ly/Option_Trading Ophir contributes to Yahoo! Finance and MarketWatch and generates nearly one and a half million readers a month. He was rated the 14th best finance follow on all of Twitter. Ophir Gottlieb is inventor of the Forensic Alpha Model (FAM) and a co-inventor of Accounting and Governance Risk Model (AGR), both now owned commercially by MSCI. Mr. Gottlieb’s methodological approach taken in creating FAM was endorsed by the head of artificial intelligence for the state of Germany as a novel and extraordinary application of advanced machine learning and quantitative finance. FAM and AGR are used by asset managers worldwide with over $1 trillion of assets under management. The FAM model has made Mr. Gottlieb one of the most recognized names in all of quantitative finance. Mr Gottlieb’s mathematics, measure theory and machine learning background stems from his graduate work in mathematics and measure theory 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.

Here’s Why Apple (AAPL) Stock Could Soar Ahead of FQ418 Earnings


By Ophir Gottlieb

There is a bullish momentum pattern in Apple (AAPL) that has persisted for 3 straight years, but it requires a condition to be met first. That condition has been met – and that means the trigger is set.

The Bullish Option Trade Before Earnings In Apple

We will examine the outcome of getting long a two-week out of the money (30 delta) call option in Apple, 10 days before earnings (using calendar days) and selling the call before the earnings announcement.

But, we will restrict the entry to times when the prior earnings move was 3% or larger. Here it is in a chart from the earnings release on July 31, 2018, and then the follow-up stock reaction on August 1, 2018 (the one day move):

Why The Large Move

The last earnings move was driven by fundamentals. Apple beat revenue, earnings, and guidance estimates, and then went ahead and beat everything else, too.

We can start with some simple ‘wow’ factor facts:

  • Net income (after tax earnings) was up 32%.
  •  EPS rose 40%.
  •  iPhone revenue rose +20%, and the active installed base grew by double digits, driven by switchers, first time smartphone buyers and existing customers.
  •  Services revenue grew +31%.
  • Other products revenue, which includes the Apple Watch, grew 37%.

As for estimates:

  • Revenue: $53.3B reported vs. estimates of $52.3B. This was the sixth quarter in a row of accelerating revenue growth since Apple had its lull in 2016.
  • EPS: $2.34 reported vs. estimates of $2.18.

Both revenue and EPS were all-time records for the June quarter for Apple.

Guidance: Revenue of $60B–$62B was announced versus estimates of $59.6B.

Services revenue: $9.55B was announced versus estimates of $9.22B (there was a one-time addition, but services would have still been over $9.3B).

iPhone ASP: The average selling price for an iPhone blew everyone away at $724, beating estimates of $699.

And then there’s China…

Apple saw 19% year-over-year growth in iPhone sales and that is the fourth consecutive quarter the company had double-digit growth in Greater China.

Back To Testing

So, to set this back-test up to make use of the prior blow out earnings, we do so in Trade Machine®, it’s this simple:

Again, note that the trade closes before earnings since Apple reports after the market closes, 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 a 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 Apple:

AAPL: Long 30 Delta Call
% Wins: 100%
Wins: 5 Losses: 0
% Return: 462%

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).

Setting Expectations

While this strategy had an overall return of 462%, the trade details keep us in bounds with expectations:

➡ The average percent return per trade was 88.9%.

Is This Just Because of a Bull Market?

It’s a fair question to ask if these returns are simply a reflection of a bull market rather than a successful strategy. It turns out that this phenomenon of pre-earnings optimism also worked very well during 2007-2008, when the S&P 500 collapsed into the “Great Recession.”

The average return for this strategy, by stock, using the Nasdaq 100 and Dow 30 as the study group, saw a 45.3% return over those 2 years. And, of course, these are just 8 trades per stock, each lasting 7 days.

Yes, we are empirical.

What Happened

This is how people profit from the options market. Take a reasonable idea or hypothesis, test it, and apply lessons learned.

Risk Disclosure

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.

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.

 

Disclaimer: The author has a long position in AAPL. The author is not receiving compensation for this article. This article is intended for informational and entertainment use only, and should not be construed as professional investment advice.

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