Earnings Trading Journal

[TheBigShort]

Hey Everyone!


After the success of my first earnings journal, I’ve decided to start fresh and trade a very specific strategy with this new journal.


The reason for doing this is I have built a strategy which allows me to quickly evaluate trading opportunities and I want to test its success rate in real time.


The strategy is aimed at making profit from a stock’s movement during their earnings releases.


I am going to be treating this journal as an experiment with the goal of testing the repeatability of my strategy.


To do this, I will be following strict guidelines for my trades which are outlined below:

• Every trade will be logged in this journal for the next 4 months (Ending February, 2020).
  
  
• I will be starting with a fixed sum of money. I will not be using any cash injections or withdrawals.
  
  
• The max loss per trade will be limited to 10% of our portfolio value.
  
  
• I will only take a trade if our volatility gauge shows 5 or above.
  
  
• All trades will be the purchase of non directional butterflies (short synthetic butterfly)
  
  
• All trades will be posted to the journal before market close.

The reason I’m outlining these rules is to control for variables so I can show the repeatability/accuracy of the strategy.


To allow me to scan for more stocks in the same amount of time, I have created a tool which runs all the calculations and then outputs a prediction for me automatically. I will be using this tool to increase my ability to hedge my risk by being able to place more trades.


I call this predictor the “Volatility Gauge”, because it ranks the expected profitability of a trade for me.


The volatility gauge is the result of a formula which uses data to evaluate these 4 areas:

1. How volatile the market thinks the stock will be as a result of this earnings event VS. how volatile has the stock been around past earnings events
   
   
2. How many people are trading this event to mitigate risk (mutual funds) vs how people are trading it looking to make a profit off the event
   
   
3. How well has the market correctly priced the earnings move for this stock in the past
   
   
4. Analyst predictions regarding the earnings event; a look at the distribution of their opinions

Lastly, I will be posting the cumulative Profit & Loss percentage of my portfolio every Friday evening, so you can see how this strategy performs overall. I have opened up a separate account with my broker so the PnL from my unrelated trading does not overlap on top of the earnings trades.


I’m excited to see how this goes. If you have any comments or questions please post them here or PM me.


You can find the previous journal here. https://www.elitetrader.com/et/threads/earnings-journal.328822/

 

[TheBigShort]

First trades,
short the synthetic flys on TSN and DHI

DHI:

TSN:

 

[.sigma]

Last earnings journal is forever a classic! I learned so much and continue to reading that thread. Looking forward to this one!

 

[.sigma]

I will only take a trade if our volatility gauge shows 5 or above.

@TheBigShort What does the parameter "5" indicate? Thanks!

 

[TheBigShort]

Thanks for the nice words. I learned a ton from that journal as well.

I'll try and answer your question from your journal and this one.

i'm curious, when trading earnings are you overall net-net long premo or short? On avg, do you see more outlier moves or subtle moves? Or is it 50/50?

I have a pretty large data set and I have found that, with out any filtering, your expected value on a short straddle is about 2% of the straddle price and about -2% on a long straddle. So if you bought a straddle for $10 on average you will lose 20 cents. So on average I am short gamma

I will only take a trade if our volatility gauge shows 5 or above.

@TheBigShort What does the parameter "5" indicate? Thanks!

The vol gauge is like the fama-french factor model - Small Minus Big, High Minus Low. I add up all these factors to give me an output. For example Value is a factor in Fama-French and QoQ Implied Move Change is a factor in my model. A vol gauge factor of 7 would be equivalent to buying a stock that has all five factors in the fama-french model (Small Cap, Low P/B etc...). In short +5 means expensive vol and sub 2 indicates cheap vol.

 

[.sigma]

I'm looking at $NVDA, Thursday AMC

Historical Earnings Move is around -/+11%

current IV is around 6.5%, $13.3 move

Semiconductors used to be fun to play, not as much lately...

22.7% IV rank and spot is sitting near highs

See how the next days range moves. But I'm looking at the Nov 225/210/195 iron fly

 

[TheBigShort]

Is the above data from MarketChameleon free?

Would you mind explaining your logic for the iron fly structure?

TBH, I don't see any juice in selling gamma on NVDA currently. You might be better off trying to find a directional edge and playing a directional fly. Dive deep into the company, if you look carefully you might find some pieces of info you can put together to formulate a trade thesis.

On a side note, you might be able to buy a straddle/strangle right now and sell it for a profit right before earnings. 6.5% is the lowest it has ever implied.

 

[qlai]

How many people are trading this event to mitigate risk (mutual funds) vs how people are trading it looking to make a profit off the event

Hi, what does this mean? Looking at institutional ownership changes and open interest?

 

[TheBigShort]

Hi, what does this mean? Looking at institutional ownership changes and open interest?

IMO you have 3 groups of people who are involved during an earnings event:
1) Mutual Funds/Asset managers
2) Speculators who are mis informed
3) Speculators who are smart or informed/insider traders.

If a stock has a bunch of positive option skew before an earnings event, how can I try to distinguish between a mutual fund selling calls/buying puts to hedge her risk Vs. an insider buying puts? Obviously, you will never know but you can group certain features together that increases your overall PnL (see above post about factor model).

 

[.sigma]

Is the above data from MarketChameleon free?

Would you mind explaining your logic for the iron fly structure?

TBH, I don't see any juice in selling gamma on NVDA currently. You might be better off trying to find a directional edge and playing a directional fly. Dive deep into the company, if you look carefully you might find some pieces of info you can put together to formulate a trade thesis.

On a side note, you might be able to buy a straddle/strangle right now and sell it for a profit right before earnings. 6.5% is the lowest it has ever implied.

Yes it is free data.

Well overall my trading has been slow the last few weeks because of this non-vol environment. So I'm just looking for opportunities in earnings and $NVDA has decent markets. Looking at a chart, it looks like NVDA does make some big moves prior to the event so a 210 long straddle could work.. But i'm basically looking to learn and see what you see about it, thanks for the reply.