Earnings Edge: Backtested Earnings Trade Ideas

Earnings announcements give us a cyclical opportunity to take advantage of inflated volatility. However, finding a trade with good mathematical metrics is challenging since probabilities, EV and alpha are not accurate across earnings reports.

The earnings backtester was created to help solve this problem and provide us with a way to make a calculated decision instead of guessing.

Earnings backtesting overview

The earnings backtester analyzes the selected trade's metrics across the previous 5 years of earnings reports, using the out-the-money percentage of the position's strike prices (OTM%), the credit or debit, the spread width, and/or the max loss.

The backtester simulates opening a position with the same metrics right before each earnings report and holding it until the next end-of-week (EOW) expiration.

Each position's backtest displays key data from the previous 20 earnings reports, including the win rate, average return, and best win.

The P/L and ROR for each simulated position is calculated based on the symbol's closing price at the EOW expiration.

For example,  if a short call spread with a strike price 3% OTM and a $1 spread width is selected, then the backtester will simulate opening a short call spread with a strike price 3% OTM and a $1 spread width across each of the earnings reports in the past 5 years with the same opening credit and max loss.

We can visualize the backtested earnings trades to see exactly how the selected strategy performed in the past, as well as the stock's price move post-earnings.

Backtest any earnings trade

To backtest any trade that crosses an earnings report, select the position in the “New Position” screen and then click the “Backtest” button that appears in the top right.