Anadarko Petroleum Corporation (NYSE:APC) : Trading Earnings Optimism With Options
There is a powerful pattern of optimism and momentum in Anadarko Petroleum Corporation (NYSE:APC) stock right before of earnings, and we can capture that pattern by looking at returns in the option market.
The strategy won’t work forever, and in fact, it hasn’t even won more often than it has lost, but since this strategy has a celever risk control, the winning trades are so much larger than the losing trades, that it has returned 210% annualized returns.
The premise is simple — one of the least recognized but most important phenomena surrounding this bull market is the amount of optimism, or upward momentum, that sets in the two-weeks before an earnings announcement.
That is, totally irrespective of whether the stocks have a history of beating earnings, in the two-weeks before of earnings, several of them tend to rally abruptly into the event. There has been a way to profit from this pattern without taking any actual earnings risk — and it is very powerful in Anadarko Petroleum Corporation.
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The Options Optimism Trade Before Earnings in Anadarko Petroleum Corporation
Let’s look at the results of buying a monthly call option in Anadarko Petroleum Corporation two-weeks before earnings and selling the call before the earnings announcement.
Here’s the set-up in great clarity; again, note that the trade closes before earnings, so this trade does not make a bet on the earnings result.
Now, unlike many of our other set-ups, this is in fact a straight down the middle bullish bet — this absolutely takes on directional stock risk, so let’s be conscious of that before we see the results, because they are mind bending.
Here are the results over the last two-years in Anadarko…