Slope deliberately keeps almost no partnership relationships, because I want Slope to be about Slope. However, there are a tiny number of companies I partner with that do things outside the scope of Slope. There is tastyworks brokerage, which is popular with Slopers, and there is the options opportunity tool from CMLViz known as TradeMachine.
I have been pleasantly surprised at the popularity of CMLViz, but I have been remiss in sharing articles about it here. I’m going to try to do a better job with that, to keep spreading the word about what Trade Machine does and how to use it. In that spirit, here is a trading example using this product:
“Buying the dip” (BTFD) only works if a stock in a down trend actually reverses to a rally. Otherwise the strategy has a different name — “buying a loser.”
We focused our testing specifically on the trigger that identifies a stock in a down channel and when the selling pressure has eased and the stock may be ready for a bounce. In other words, we focused less on a simplistic mantra of “buy the dip,” and more on the empirical view of “when the dip might reverse.”
After rigorous testing over multiple time periods and over tens of thousands of back-tests, today we demonstrate the technical conditions that have provided a strong short-term bullish momentum trigger for Monster Beverage Corporation (NASDAQ:MNST) after an abrupt stock decline as well as, broadly speaking, the Nasdaq 100 index constituents over the five year period from 2014-2019.
It doesn’t matter if MNST is in a downtrend right now. What matters is what has happened historically when that time comes, because it will come again.
Buy the Dip Trigger: The Option Trade with Technical Analysis and Moving Averages in Monster Beverage Corporation (NASDAQ:MNST) .
We will examine the outcome of going long an out-of-the-money (strike price is set to the 40 delta) call option, in options that are the closest to 30-days from expiration (using calendar days). But we follow three rules:
* Never Trade Earnings
Let’s not worry about earnings. Here it is, first, we enter the long call.
Use a technical trigger to start the trade, if and only if these specific items are met.
Trigger is here: [Trade Machine members only]
To put a picture to the words, here is an example for Apple from February of 2018, below, where the stock was in a down trend, then it crossed above the two trigger requirements, and a stock rally ensued.
You can set an alert in Trade Machine®, which will track all of these moving parts for you. Let Trade Machine do the work for you — there’s no need to stare at the screen.
* Finally, we set a very specific type of limit:
* Use a 50% limit and a 50% stop.
At the end of each day, the back-tester checks to see if the 30-day long call is either up or down 50%. If it is, it closes the position.
Here are the results for the 30-day long call over the last two-years in Monster Beverage Corporation:
|MNST: Long 40 Delta Call|
|Wins: 4||Losses: 0|
The mechanics of the TradeMachine are that it uses end of day prices for every back-test entry and exit (every trigger).
While this strategy had an overall return of 187.5%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 50.46% for each 30-day period.
Checking the Moving Average
You can check to see the values of all the moving averages discussed above with real-time daily prices, including live after hours prices, for MNST by viewing the Pivot Points tab on www.CMLviz.com.
Rigor to the Option Backtester and Backtesting
We compared this technical analysis trigger on the constituents of the Nasdaq 100 versus the results from the baseline. The baseline is simply owning calls and rolling them every 30-days with the same stop and limit as introduced above (50%). Here’s what we found:
* Over the one-year period ending June 2019, the average trade return was 23% per 30-day period using the “buy the dip” technical trigger compared to just 6% using rolling calls with no technical structure.
* Over the 2-years ending June 2019, the average trade return was 24% per 30-day period using the “buy the dip” technical trigger compared to just 5% using rolling calls with no technical structure.
* Over the 3-years ending June 2019, the average trade return was 16% per 30-day period using the “buy the dip” technical trigger compared to just 7% for the baseline.
Back-testing the “Buy the Dip” Trigger: More Time Periods in Monster Beverage Corporation
Now we can look at just the last year as well:
|MNST: Long 40 Delta Call|
|Wins: 3||Losses: 0|
We’re now looking at 165.1% returns, on 3 winning trades and 0 losing trades.
➡ The average percent return over the last year per trade was 48.2%.
Tap here to try the Buy the Dip Trigger for yourself and take advantage of the nearly 50% discount given to Slope readers.