Trading the Retail Swoon Ahead of Pier 1 Earnings with Options

Pier 1 Imports Inc (NYSE:PIR) : Avoid Bear Market Risk: The Secret to Option Trading Before Earnings

Date Published: 2017-09-20

Preface 
With the market's direction becoming tenuous and retail stocks looking to vulnerable to large swings, we can explore option trading opportunities in Pier 1 Imports Inc (NYSE:PIR) that do not rely on stock direction. It turns out, over the long-run, for stocks with certain tendencies like Pier 1 Imports Inc, there is a clever way to trade market anxiety or market optimism before earnings announcements with options. 

This approach has returned 163% with a total holding period of just 72 days, with 11 wins and 1 loss over the last 3-years. 

NOTE: According to Wall Street Horizon (our earnings date provider),PIR has earnings due out 9-27-2017 after the market closes. 

The Trade Before Earnings 
What a trader wants to do is to see the results of buying an at the money straddle a few days before earnings, and then sell that straddle just before earnings. 

This trade is not a panacea, which is to say, we have to test it, stock by stock, to see when and why it worked. We start with Pier 1 Imports Inc. 

Trade Discovery 
We ran a scan for all tickers looking at the pre-earnings straddle, six-days before the earnings release. 

The Back-test 
While the scanner looks to open a back-test 6 days before earnings and close it one day before earnings, we do note that PIR reports earnings after the close on 9-27-2017 according to our data provider Wall Street Horizon. So, we adjusted the back-test a little to optimize it, like this: 

We are testing opening the position 6 calendar days before earnings and then closing the position the day of earnings. This is not making any earnings bet -- it is closed before earnings are announced. This is not making any stock direction bet. 

Once we apply that simple rule to our back-test, we run it on an at-the-money straddle: 

Returns 
If we did this long at-the-money (also called '50-delta') straddle in Pier 1 Imports Inc (NYSE:PIR) over the last three-years but only held it before earnings we get these results: 

We see a 163% return, testing this over the last 12 earnings dates in Pier 1 Imports Inc. That's a total of just 72 days (6 days for each earnings date, over 12 earnings dates). We can also see that this strategy hasn't been a winner all the time, rather it has won 11 times and lost 1 time, for a 91% win-rate 

Setting Expectations 
While this strategy has an overall return of 163%, the trade details keep us in bounds with expectations: 
      âž¡ The average percent return per trade was 14.4%. 
      âž¡ The average percent return per winning trade was 16%. 
      âž¡ The percent return for the losing trade was -3.3%. 

Commentary 
With retail stocks still in shell shock from all things Amazon, and the poor showing from Bead, Bath and Beyond (BBBY), there is at least a reasonable hypothesis to support a narrative that PIR stock could in fact be volatile over the next week ahead of earnings. 

WHAT HAPPENED 
This is it -- this is how people profit from the option market -- finding trading opportunities that avoid earnings risk and work equally well during a bull or bear market. 

To see how to do this for any stock we welcome you to watch this quick demonstration video: 
Tap Here to See the Tools at Work 

Thanks for reading. 

Risk Disclosure 
You should read the Characteristics and Risks of Standardized Options. 

Past performance is not an indication of future results. 

Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment. 

Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.