The Numbers Game
...and how it relates to emotions in Trading
This publication centers around a trading system on taking advantage of predictable moves in implied volatility during earnings releases. The following stats are from the past five Earnings Season’s and demonstrate what I would consider a baseline performance for this system:
I currently track roughly 150 different stocks for implied volatility swings vs. their performance based on a rolling historic success rate of 75% or more during the past four earnings of a given set of criteria.
Position sizing is based on an expected loss of 2.5% of a $10,000 account, meaning I design my trades to lose $250 or less. The above results consider 187 trades over five ER seasons (Summer 2021, Fall 2021, Winter 2022, Spring 2022, and Summer 2022).
Interestingly, the beginning of Summer 2022 Earnings Season saw a poor first week. For a new trader (and new subscriber to this blog), the first five trades were challenging to swallow. I remember some members “gave up” to watch, only to look back after the season was closed to see a 64.44% win/loss ratio and total profitability of over $2,000.
When my friends and family hear about my trading “hobby,” I sometimes get - Michael is a gambler. Actually I really hate this analogy, but I’m not a gambler. I’m the dealer.
Gamblers have a choice to place a bet. Dealers do not have a choice. They must take the bet (trade), but the casino that employs them knows that they have the numbers on their side. That is categorical based on statistics. The casino always win 52.7% of the time on red or black on roulette in the long term. Gamblers stop either when they run out of money or their emotions tell them to quit. Dealers do not have emotions - they have rules to follow by the casino.
So the key question is how many rules based trades does it take to trust the numbers? I don’t know for sure, but I’ve been playing this numbers game for seven years (meaning 28 earnings seasons) and I have an unofficial win/loss ratio of roughly 65%. My official audited win/loss ratio is 68.45%. I’m happy relying on this ratio to use as a baseline for my emotions when trading. Actually, forget about emotions. I just trade my system and alert premium members of this publication in advance what I am planning and provide transparency post trade.
Here are the results from the first week of Fall 2022 Earnings Season:
Last weeks post, which detailed the planned trades has been unlocked for all readers. It can be found here. Unfortunately, I didn’t get a fill on the first play, JNJ (which was a success).
One losing day, let alone one losing week, means nothing against the backdrop of long term results. I’m looking forward to trading all 30 or 40 opportunities this earnings season.
Here are next weeks planned trades:
Earnings Iron Condors
Monday, 24 October 2022
VLO (3 out of 4 wins). Reports BMO on Tuesday…
MMM (3 out of 4 wins). Reports BMO on Tuesday…
GE (3 out of 4 wins). Reports BMO on Tuesday…
Tuesday, 25 October 2022
BA (3 out of 4 wins). Reports BMO on Wednesday…
Wednesday, 26 October 2022
MA (3 out of 4 wins). Reports BMO on Thursday…
Thursday, 27 October 2022
GILD (3 out of 4 wins). Reports AMC on Thursday
Success on VLO, MMM, and GE.
No play on BA as the risk to reward was too small. Strikes were 134/139/150/155 ($5.00 wide) for a credit of $1.15. My max risk for these plays is $250 so $315 was too rich for me. If we had been further along in ER season with profit padded into the account, I may have gone for it.
The account is back in the green. Win/loss ratio is now at 62.5% and profit factor is 1.29.
VLO: https://shared.tradersync.com/ricepirate/e8465d7e-5420-11ed-821c-061a3d52649f?ref=https://www.tradersync.com/?ref=michaelkuhns
MMM: https://shared.tradersync.com/ricepirate/37080426-542b-11ed-821c-061a3d52649f?ref=https://www.tradersync.com/?ref=michaelkuhns
GE: https://shared.tradersync.com/ricepirate/969301be-5446-11ed-821c-061a3d52649f?ref=https://www.tradersync.com/?ref=michaelkuhns