PEAD: About As Close To A Free Lunch As The Market Will Give You

PEAD is post-earnings announcement drift. It’s a “phenomenon” discovered by in the 1960’s when some guys noticed that after earnings releases the stock nearly always tends to continue drifting in the direction that the earnings tilted. A stock has surprisingly good earnings and jumps on the news, it will probably keep going up for the next few weeks. Same with posting a loss, it will likely continue to drop in price not just the day after earnings, but for the next few weeks.

For example, Kraft Heinz is being slaughtered this morning. As we write, the stock is down 27.5%. Long story short, it because of a trifecta of bad news. Quarterly earnings were massively disappointing, they cut their dividend by 25% (one of the main reasons people buy huge, old companies like this is for the dividend), and they also disclosed that they are being investigated by the SEC for some possible funny business. Whether it’s true or not doesn’t matter. What matters is that the market didn’t like it. So now we have a stock down a massive amount and while this is a VERY overstated example, we can expect with nearly 100% certainty that the stock will continue to fall for a while. It will drift in the direction that it moved initially. Buying right after a huge drop like this is 100% a terrible idea. It may bounce up a bit because of the severity of today’s drop, but that’s only a band-aid on a bullet wound. It’s a pretty damn safe bet to assume you can short the stock or buy puts and probably turn a profit (assuming you don’t overpay for your option).

Conversely, you have a stock like ROKU which posted earnings and revenue higher than Wall Street expected. The stock is up over 20%, a massive over-reaction to an earnings beat. It doesn’t matter though, the street is excited. We can expect Roku to continue in the upward direction for a while. OR at the very least it will likely outperform the broad market.

So that’s all that nerdy acronym means… PEAD = if the earnings announcement was good, the stock will continue moving up for a while. If earnings sucked, it won’t just move down the day after the announcement, it will continue down for the short-term.



Further reading for the financial nerd types:

Post-Earnings Announcement Effect (Quantpedia)

Surprising Facts on Post-Earnings Announcement Drift (AlphaArchitect)
note: read anything Alpha puts out. Their work is golden.

Drift or Jump: What Drives Post-Earnings Announcement Stock Returns? (SSRN)

Post-earnings-announcement-drift and 52-week high: Evidence from Korea (ScienceDirect)


CBOE’s VIX Tail Risk Hedge Strategy (Advanced Options-Based)

After a massive V-bounce since the Christmas Eve massacre, some of the more advanced readers here may be considering taking some profits off the table or adding some downside hedging. Side note, pardon the fact we haven’t done almost anything on this level as of yet. We’re hoping to get beginners catching up so we can start the “fun” stuff. Anywhoooo, 1-Month returns tends to have a short term reversion, so right now is the perfect time for adding a hedge. The following is a strategy that most have never heard of courtesy of the CBOE. Execution is simple assuming that you have the ability to purchase VIX options. 

CBOE Tail Hedge Strategy


1. Review the current level of the VIX. Right now, we’re sitting at 15.74

2. Depending on the VIX level use the following table to figure out how much of your portfolio will be allocated to this hedge.

So in this case, even though its just by a hair, we’d go with the 1% allocation with the VIX between 15-30. For the sake of simplicity, we’re going to assume a portfolio size of $100k. So 1% = $1,000 to be used for the hedge purchase.

3. You will use the forward month of the VIX option table, and find the call option sitting closest to 30 Delta. Currently, that for the forward month of 13 Feb 19, the closest is going to be the $17 strike sitting at 31 Delta.

4. The Feb 13 19 $17 call currently has a mid of .85. So with $1K, that’s going to be $1K/$85 = 11 calls. That’s it. Just let it ride to expiration.

5. If you’re new to VIX options, keep in mind that they have European Style cash settlements. Meaning your ITM calls will settle in cash and can ONLY settle on the date of expiration. The call we bought in the above example only has 8 days left to expiration. If you’re in the money, it will settle as cash. If the market plummets, that cash value will skyrocket.

6. The day after expiration, you will start again from step 1 and review where the VIX is sitting by that time. 

Easy enough, and back tested results are phenomenal (and the best CBOE tested strategy). If you’re interested in reading a bit more on the testing, see the links below.




Further Reading:

Portfolio Hedging using VIX Calls (TheOptionsGuide)

Buying VIX Calls As A Portfolio Hedge (JimFink)

Cboe VIX Tail Hedge Index (VXTH)

Settlement Information for VIX Derivatives

Key Tools for Hedging and Tail Risk Management PDF- CBOE

^^Essential Download for your hedging library.

Options- and Volatility-Based Strategy Benchmark Indexes A few CBOE alternatives