Institutions expect some stocks to have a selloff after an anticipated negative earnings report this leads to the selling of their positions prior to the earnings announcement which will drive down the price.
Delphian calls this strategy a Bearish Pre-Runner and based on historical analysis, the price drops typically start 5-20 days before earnings.
An excellent example of this is Booking.com (BKNG), within the 15 days prior to earnings it has had an average move of over -5% for 7 of the past 10 quarters.
The bearish pre-runner strategy tries to capture a 25-50% gain for a long put within the 20-day window prior to earnings.
The trade is closed when any of the following conditions are met: Profit target is met, stop-loss is met or the day prior to the earnings release. The strategy uses long puts as the primary strategy as multiple option legs are typically not optimal for the rapid price drops.
Additionally, short strategies like naked calls are risky, as the implied volatility will increase going into earnings, likely negating some of the effects of any price drops.
Delphian's default bearish pre-runner criterion involves a price change that is less than or equal to -3% from 15 days prior to the earnings announcement for at least 7 out of last 10 earnings reports.
The screener will analyze all historical data and generate a qualifying list of stocks. The screener criterion can be customized to match an individual’s trading preferences.
Any of the fields shown below can be altered to the user’s preference.
Delphian created the Earnings Calendar so users can quickly screen and backtest symbols on one screen.
Symbols can be tested individually or as a group using the bulk testing feature.
All the trading strategy fields shown below are customizable to the user’s preferences.
Below are the results of a backtest of a long put strategy for Baidu, Inc. (BIDU) over the last 10 earnings releases, based on entering a trade with the characteristics shown above.
Over the previous 10 earnings, the long put position produced a cumulative profit of $2,145 per contract with a profit factor of 9.65 and a win rate of 90%.
The chart below displays the individual trade results for the BIDU analysis performed above.
Bearish pre-runners trades are repeatable each quarter and a fairly simple trade to execute. After trade entry, orders can place for profit targets and stop losses so you don’t have to watch the trade constantly.
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