This article was originally published on this site
The results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.
There is a powerful pattern of optimism and momentum in Alleghany Corporation (NYSE:Y) 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, and in fact, it hasn’t even won more often than it has lost, but since this strategy has a celever risk control, the winning trades are so much larger than the losing trades, that it has returned 436% annualized returns.
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.
That is, totally irrespective of whether the stocks have a history of beating earnings, in the two-weeks before of earnings, several of them tend to rally abruptly into the event. There has been a way to profit from this pattern without taking any actual earnings risk — and it is very powerful in Alleghany Corporation.