Trading Earnings Optimism With Options in Humana Inc

PREFACE

There is a powerful pattern of optimism and momentum in Humana Inc (NYSE:HUM) 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, but for now it is a momentum play that has not only returned 217% annualized returns, but has also shown a high win-rate of 63%.

PREMISE

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.
Now we can see it in Humana Inc.

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The Options Optimism Trade Before Earnings in Humana Inc

Let’s look at the results of buying a monthly call option in Humana Inc 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 Humana Inc:

HUM: Long Call
% Wins:63%
Wins:
5
Losses:
3
% Return: 66.7% 
% Annualized: 217% 

We see a 66.7% return, testing this over the last 8 earnings dates in Humana Inc. That’s a total of just 112 days (14 days for each earnings date, over 8 earnings dates). That’s an annualized rate of 217%. That’s the power of following the trend of optimism into earnings — and never even worrying about the actual earnings result.

We can also see that this strategy hasn’t been a winner all the time, rather it has won 5 times and lost 3 times, for a 63% win-rate and again, that 66.7% return in less than six-full months of trading.

WHAT HAPPENED

The personality of this bull market is one that shows optimism before earnings — irrespective of the actual earnings result. That has been a tradable phenomenon in Humana Inc.

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