The One-Week Pre-earnings Momentum Trade With Options in Alexandria Real Estate Equities Inc



The One-Week Pre-earnings Momentum Trade With Options in Alexandria Real Estate Equities Inc

Alexandria Real Estate Equities Inc (NYSE:ARE) : The One-Week Pre-earnings Momentum Trade With Options

PREFACE

There is a bullish momentum pattern in Alexandria Real Estate Equities Inc (NYSE:ARE) stock 7 calendar days before earnings, and we can capture that phenomenon explicitly by looking at returns in the option market.
The strategy won’t work forever, but for now it is a momentum play that has not only returned 2846.2%, but has also shown a win-rate of 83%.

LOGIC


The logic behind the test is easy to understand — in a bull market there can be a stock rise ahead of earnings on optimism, or upward momentum, that sets in the one-week before an earnings date.
Now we can see it in Alexandria Real Estate Equities Inc.


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The Bullish Option Trade Before Earnings in Alexandria Real Estate Equities Inc


We will examine the outcome of getting long a weekly call option in Alexandria Real Estate Equities Inc 7-days before earnings (using calendar days) 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.

RISK MANAGEMENT


We can add another layer of risk management to the back-test by instituting and 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 Alexandria Real Estate Equities Inc:







ARE: Long 40 Delta Call
% Wins: 83%

Wins:
10

Losses:
2

% Return:  2846.2% 

% Annualized:  12,367% 





We see a 2846.2% return, testing this over the last 12 earnings dates in Alexandria Real Estate Equities Inc. That’s a total of just 84 days (7-days for each earnings date, over 12 earnings dates). This has been the results of following the trend of bullish sentiment into earnings while avoiding the actual earnings result.

We can also see that this strategy hasn’t been a winner all the time, rather it has won 10 times and lost 2 times, for a 83% win-rate and again, that 2846.2% return in less than six-full months of trading.

Setting Expectations


While this strategy had an overall return of 2846.2%, the trade details keep us in bounds with expectations:


      The average percent return per trade was 104.68%.



Back-testing More Time Periods in Alexandria Real Estate Equities Inc


Now we can look at just the last year as well:







ARE: Long 40 Delta Call
% Wins: 83%

Wins:
3

Losses:
1

% Return:  363% 

% Annualized:  4,732% 





We’re now looking at 363% returns, on 3 winning trades and 1 losing trades. It’s worth noting again that we are only talking about one-week of trading for each earnings release, so this is 363% in just 4-weeks of total trading which annualizes to 4,732%.


      The average percent return over the last year per trade was 69.97%.

WHAT HAPPENED


Bullish momentum and sentiment ahead of earnings can be a repeating pattern in a bull market for some companies. This is just one example of what has become a tradable phenomenon in Alexandria Real Estate Equities Inc.

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