Backtesting
Thursday, June 18th 2020
Backtest Basics: Trading Around Earnings
See how to construct options trading strategies around earnings, to avoid being in a position at earnings announcement or to trade during the earnings move.
Summary
Learn how to construct options trading strategies around earnings or avoid being in a position at earnings announcement using a backtester. Set Entry Date Triggers to initiate a trade before earnings and Exit Date Triggers to exit relative to earnings. Examples of a covered call strategy and an iron butterfly strategy are provided.
In our backtester, you can test a strategy that trades around earnings as well as strategies that avoid earnings.
To use the earnings date feature, select Entry Date Triggers setting how many days before earnings to initiate a trade and then select Exit Date Triggers to set when to exit relative to earnings.
To avoid earnings, you would set the Entry Date Trigger min/max however many days before you want. For the covered call strategy, we set these to min=20 and max=75 to make sure we don't trade back into a strategy that we just exited. This gives us enough time to be in the trade before exiting the day before earnings announcement.
For exiting covered call strategy, select the Exit Date Triggers and set the Occurrence to 'before' and the Days to 1.
If you want to trade a strategy around earnings, you can set the entry days lower like min/max 1 to 3.
Instead of before, set the Occurrence to after.
Here is an example avoiding earnings, an INTC short call:
Here is an example trading earnings, an AMZN iron butterfly:
More reading: https://blog.orats.com/covered-call-backtest-finding-the-best-maturity-strike-iv-and-earnings-methods
Disclaimer:
The opinions and ideas presented herein are for informational and educational purposes only and should not be construed to represent trading or investment advice tailored to your investment objectives. You should not rely solely on any content herein and we strongly encourage you to discuss any trades or investments with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. Option trading and investing involves risk and is not suitable for all investors.
All opinions are based upon information and systems considered reliable, but we do not warrant the completeness or accuracy, and such information should not be relied upon as such. We are under no obligation to update or correct any information herein. All statements and opinions are subject to change without notice.
Past performance is not indicative of future results. We do not, will not and cannot guarantee any specific outcome or profit. All traders and investors must be aware of the real risk of loss in following any strategy or investment discussed herein.
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Day trading, short term trading, options trading, and futures trading are extremely risky undertakings. They generally are not appropriate for someone with limited capital, little or no trading experience, and/ or a low tolerance for risk. Never execute a trade unless you can afford to and are prepared to lose your entire investment. In addition, certain trades may result in a loss greater than your entire investment. Always perform your own due diligence and, as appropriate, make informed decisions with the help of a licensed financial professional.
Commissions, fees and other costs associated with investing or trading may vary from broker to broker. All investors and traders are advised to speak with their stock broker or investment adviser about these costs. Be aware that certain trades that may be profitable for some may not be profitable for others, after taking into account these costs. In certain markets, investors and traders may not always be able to buy or sell a position at the price discussed, and consequently not be able to take advantage of certain trades discussed herein.
Be sure to read the OCCs Characteristics and Risks of Standardized Options to learn more about options trading.
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