The ORATS Earnings Move Report is published each trading day and shows the stocks that have confirmed earnings announcements. The report has important information for earnings options traders like:
- the implied move in the stock,
- the historical average move in the stock,
- the implied volatility with earnings and taken out, and
- historical volatility with and without earnings.
This information was tested to see if it can identify profitable trades in a backtest. Here's a sample of a report:
Four options strategies, buying and selling straddles, and buying and selling calendar spreads were tested, entering the day before the announcement and exiting the day after - a one day hold.
The best buy straddle was the one between 14 and 365 days to expiry that had the highest forecast theoretical value ratio to the mid market value. Conversely, the best sell had the lowest ratio. The best calendar used the best buy and sell concurrently and if the buy straddle was a longer duration it was termed a long calendar and was tested separately from those that happened to be short calendars.
ORATS forecasts the entire surface using the next 20 trading days volatility derived from historical volatility and combines this with forecasts of long term cross sectional implied volatility, put call slope and derivative (skewness and kurtosis), and earnings forecasts. This creates a theoretical value for every call and put option.
Triggers tested for determining whether to enter one of the four strategies were:
- short leg forecast ratio
- long leg forecast ratio
- implied earnings move divided by historical average move in the stock
- implied volatility divided by historical volatility
- implied volatility divided by implied volatility with earnings effect taken out
For example, one of the best triggers for Buy Straddle were high forecast ratios for both the short and long leg even though only the long leg was traded and others. ORATS subscribers can email me for the best triggers for each strategy.
Earn move reports from January 2020 until July 2021 were used in the test and reports from July 2021 to October 2021 were used as an out of sample test.
Here are the results of the test.
- The best performing strategy out of sample was the long calendar.
- The worst performing strategy was the long straddle in sample and short calendar out of sample (only one trade however).
- 5217 earnings announcements and 20,868 trades were tested.
- To normalize the different trades, the profit for each was divided by the stock price.
In sample, the Buy Straddle returned 0.40% on 68 trades representing 1.3% of the possible earnings announcements with the largest loss of -3.8% and largest gain of 13.7%. Out of sample, the Buy Straddle returned 0.65% on 13 trades.
In sample, the Sell Straddle returned 1.18% on 214 trades representing 4.1% of the possible earnings announcements with the largest loss of -26.7% and largest gain of 8.3%. Out of sample, the Sell Straddle returned 0.65% on 54 trades.
In sample, the Buy Calendar returned 0.90% on 205 trades representing 3.9% of the possible earnings announcements with the largest loss of -10.3% and largest gain of 6.1%. Out of sample, the Buy Calendar returned 0.91% on 54 trades.
In sample, the Sell Calendar returned 0.50% on 37 trades representing 0.7% of the possible earnings announcements with the largest loss of -2.4% and largest gain of 8.7%. Out of sample, the Sell Calendar returned 0.00% on 0 trades.
Here are a couple of sample trades, the best (SFIX) and worst (FDX) calendar from out of sample. They happened to be on the same day:
One of the triggers for the long calendar was a high ex earnings IV divided by HV. You can see how high both FDX and SFIX were going into earnings.
SFIX 10/8/2021 $37 strike straddle was sold for $7.725 and the 3/18/2022 $40 was bought for $15.375 representing a forecast ratio of 0.75 and 1.25 respectively. Each strike represents the closest to a 50 delta. At the time of the opening trade simulation 14 minutes prior to the close, SFIX stock price was $35.82 (the report shows $36.37). The next day at 14 minutes before the close when the trade was exited the price was $41.35 up $5.53. The earnings move was $0.78 less than expected. The short was bought back for $5.75 and long sold for $14.75 for profits of $1.975 and -$0.625 respectively or a total profit of $1.35 or 3.8%.
FDX 10/8/2021 $255 straddle was sold for $16.85 and the 6/17/2022 $260 was bought for $53.025 with forecast ratios of 0.72 and 1.09. The stock price fell from $252.87 to $229.97 down $22.90 or $10.88 larger move than expected. The short was bought back for $25.86 and long straddle sold for $52.925 for losses of -$9.01 and -$0.10. The total loss was -$9.11 or 3.6%.
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More reading here: https://blog.orats.com/hs-search-results?term=earnings+move