- I don't see how you can compare a 100% loss to a 30% loss - as if the 30% is better.
- What is important is the risk:reward in dollars.
AAPL - Earnings May 1
- Thread starter OptionsOptionsOptions
- Start date
What is important is 2 factors: risk/reward and probability of success (winning ratio). You can have excellent risk/reward but lousy probability of success, and vice versa. You cannot have both.
When you hold through earning, you know your risk/reward, but your probability of success is completely random since earnings are unpredictable. However, since options on average are overpriced before earnings (you can see why by checking performance of ATM straddle on almost every stock), buying options before earnings is in the long term a losing proposition.
You position to lose 2-3% of your account based on a 20-30% loss so what’s the difference of positioning a 100% loss to 2-3% of account value? So you allocate 2-3% instead of 10% Not only that realistically the option would still have some value after earnings so the real R/R was probably greater than 3/1 when I placed the trade, assuming max loss it would be 3/1.
Look not trying to step on your toes just saying a strategy was involved making my decisions. But checking out your profile you quote “Michael Covel”. It’s interesting that Covel an advocate of “turtle trading” and trend following him and many turtles have clearly stated that those systems often have have W/L of less than 50% yet R/R is the basically the bread and butter of the systems they advocates and many of them claim to be highly succesful. So what if a guy finds a way to systematically play earnings?
Surely just buying any option and praying would be gambling but it’s possible to systematically approach earnings just like systematically approaching trend following.
Look not trying to step on your toes just saying a strategy was involved making my decisions. But checking out your profile you quote “Michael Covel”. It’s interesting that Covel an advocate of “turtle trading” and trend following him and many turtles have clearly stated that those systems often have have W/L of less than 50% yet R/R is the basically the bread and butter of the systems they advocates and many of them claim to be highly succesful. So what if a guy finds a way to systematically play earnings?
Surely just buying any option and praying would be gambling but it’s possible to systematically approach earnings just like systematically approaching trend following.
@FXbeachbum
Few comments:
If you position for 100% loss, that means that you average return per trade must be 4 times higher in order to have same overall performance (or you should have 4 times more trades) all other factors equal. Not easy.
Now, if you were wrong and the stock went down, the spread would have almost zero value. (If you don't believe me, check out the previous cycle where you could buy the same 170/175 spread for similar price, and next day it was worth around 0.05, 95%+ loss). But even when you were right and it was trading above your short strike, the $5 spread was worth around 4.00-4.30 the next day. To realize the full gain, you had to wait till expiration, risking a reversal.
Regarding Covel - my quote refers to "not losing too much" which has always been my principle in trading. With trend following, the principle is to cut your losses fast when you are wrong, and make big gains when you are right. Following this principle, you can have lousy winning ratio and still make money. But when playing earnings, you cannot cut the loss when you are wrong.
Not saying that your strategy cannot work. My point is that earnings are too unpredictable, and you need too many things to work in your favor to make a gain. And in general, options are overpriced before earnings, so where is your edge in the long term?
Few comments:
If you position for 100% loss, that means that you average return per trade must be 4 times higher in order to have same overall performance (or you should have 4 times more trades) all other factors equal. Not easy.
Now, if you were wrong and the stock went down, the spread would have almost zero value. (If you don't believe me, check out the previous cycle where you could buy the same 170/175 spread for similar price, and next day it was worth around 0.05, 95%+ loss). But even when you were right and it was trading above your short strike, the $5 spread was worth around 4.00-4.30 the next day. To realize the full gain, you had to wait till expiration, risking a reversal.
Regarding Covel - my quote refers to "not losing too much" which has always been my principle in trading. With trend following, the principle is to cut your losses fast when you are wrong, and make big gains when you are right. Following this principle, you can have lousy winning ratio and still make money. But when playing earnings, you cannot cut the loss when you are wrong.
Not saying that your strategy cannot work. My point is that earnings are too unpredictable, and you need too many things to work in your favor to make a gain. And in general, options are overpriced before earnings, so where is your edge in the long term?
No one here straddled it was all long one leg or verticals. Right the probability of straddles/strangles is a losing proposition because it’s too expensive, selling them is a flawed strategy too. Sell enough insurance then when catastrophe comes in you’re screwed. Therefore you take the bias get your 50/50 but get your risk reward and a cost basis of half the straddle/strangle that makes it work better.
I believe option pricing is flawed. If you look at some of “natenberg”s work he points out all kinds of interesting things which I agree with. One pricing is flawed because option pricing believes that the volatility and standard deviation will center around the current price. Two in short standard deviation has flaws. If this volatility becomes mostly directional in one direction then the buyer stands to profit. Basically any options buyer of any strategy is basically saying they believe the options are mispriced whether they acknowledge this or not.
So I’m going to go all technical on this. Based on Front month ATM options the day before earnings option premium for 170 calls closest to ATM was around $4 and puts around $6 this tells me the options market has priced in about a $10.00 move before front month expiration. For the catalyst itself about a 4% move was priced or a $7.00 move. What I did was try to capture 5.00 of this on a directional bias. Hypothetically I have a 50/50 of being right, and a catalyst would make most of this swing one way. So if the market is fairly efficient at predicting the move not always perfect but close and we take the predicted move plus the price before the release we can expect Apple to be mid 170s or mid 160s post move. In addition you look at the technicals and see what prices are realistic. Looking at technicals if this thing pops 180ish is the next resistance. Therefore if odds are approximately 50/50 And I’m paying 1.30 for a potential 5.00 the R/R is greater than 2/1 and let’s say I only get 2/1 my break even point would be a 33% W/L rate. I could lose 2 trades and win one at a 2/1 to hit break even. Idk I’m worried no matter how much I explain you don’t understand the math. I feel you don’t get losing 100% on a 2% position is the same as losing 20% on a 10% position.
You’re also assuming that the position has to be sold the post earning session and not accounting for any carry through in the days to follow. I actually did carry a front month 170/175 last earnings sure took a dump for awhile but you know the funny thing about options if you position for max loss once you’re at max loss or near why close the position? That 170/175 was ITM at expiration. Not at max profit however.
As far as options are expensive isn’t that the point of a spread to mitigate the expensive volatility and theta decay?
- In this case you have to close the position before expiry. Take the profit.
- Next time reconsider debit spreads - is the short option worth it? IMO ..... no.
- If the idea behind a debit spread is to reduce the dollar risk it might be better to move the long option 1-strike further OTM - buy the 175 call.
- During earnings the line between 170 and 175 is very thin.
I understand that you buy a vertical and not a straddle. My point was that if the straddle implies the expected move, then straddle P/L after earnings can be a good estimate if options are underpriced or overpriced before earnings. For most stocks (including AAPL), straddle was a consistent loser, which means that on average, options are overpriced before earnings. Which means that on average, even if you are right, you are overpaying. Yes the sold option reduces the risk, so in my opinion, it is still better than straight option.
I perfectly understand that losing 100% on a 2% position is the same as losing 20% on a 10% position. My point is that if you gain 20% on 10% position, you need to gain 100% on 2% to the same portfolio gain.
As for technicals - they might matter in the long term, but not when you are looking at earnings. Near term reaction to earnings is completely disconnected from technicals.
Yes in your case you held couple more days and it payed off. But I have seen too many cases when you would completely lose most of your gains by holding an extra 1-2 days.
There is always a tradeoff. Debit spreads produce less gains but also reduce the risk.
I tend to notice that catalysts tend to accelerate the technicals if they both align. In my opinion a positive surprise would shorten the time Apple gets back to $180.
I agree. But if it was a negative surprise (or market would see it as negative surprise), it would go down and technicals would not really matter.
The bottom line is that I prefer more stable and predictable strategies, where I can get stable and consistent gains of 10-30% but also limit my losses to 20-30%, while you prefer to aim for higher gains and willing to accept higher losses.
Perfectly fine - but my question still remains: if we both are willing to risk the same amount of money, then your sizing is about 4-5 times smaller than mine. Which means you need your average P/L per trade to be 4-5 times higher. Agree?