AMZN strangle after earnings - a thought about others as well.

J

JJacksET4

Volatile AMZN options:

I was just watching this (didn't do any trades), but it lead me to a thought.

First the numbers - AMZN close Tues (before earnings report) : 182.30
AMZN open Wed (183.25)

So, the stock opened largely unchanged. As you would expect, long Apr strangles got clobbered. Here are the numbers for the nearest strangle.

185 Call - Prev Close - $450
180 Put - Prev Close - $444
Cost of strangle ~ $990

185 Call - Open - $99
180 Put - Open - $70
Value of strangle ~ $170

However, AMZN wasn't exactly content to stay at the $183 price range, due to the market overall and some positive comments on the stock.

AMZN closed today at $196.63

which results in the current values shown here now (last trades this time):

185 Call - $1195
180 Put - $15
Value of strangle ~ $1200

What is interesting to me about this is the idea that you take a high-flyer volatile stock and do a straddle just after it opens after earnings with the pumped up earnings IV already out, but there is still potential for the stock to move largely that day or in the coming days. Of course, in this example the Apr weeklys don't have much time so I understand that a reasonable move fairly quickly would have been necessary.

Just after an earnings report even after the stock opens, there is still always resonable potential for upgrades/downgrades, good or bad comments, reports from brokers like GS to say start
buying or whatever. It seems to make sense that a day like today where they had earnings the night before even thought it didn't move much was more likely to be volatile then just
any other average day for a stock like AMZN.

Even though you might think its easy to look back at what happened and say this, I can't imagine why anyone would have sold those strangles for example immediately on the open at $182.30 - would anyone really feel very confident those Break Evens wouldn't be hit? in truth, the long strangle bought at open would have been profitable by just after 10:00 AM EST!

Just to note it, this would have worked quite well using the May options also - obviously not as well yet on a percentage basis, but those options still have more time, and would have obviously been safer had no move come today.

So, the idea again would be to watch hi flyers around earnings and if the stock doesn't move much in the AM and IV has fallen (as would be very likely) to consider buying a short term straddle/strangle. I guess one thing to take out of this is that sometimes earnings can cause a small movement, but a larger movement can actually come afterwards, and you can get in with a lower IV.

JJacksET4
 
This was a case of the markets being wrong. 2.5% breakeven for a 2 day strangle in AMZN seems cheap even if there weren't earnings.

Unfortunately I missed it.
 
I tried a double diagonal on AMZN late yesterday:

+MAY 170 Put -2.80
-APR5 175 Put +2.79
-APR5 185 Call +4.45
+MAY 190 Call -3.85

"Bought" for .59 credit.

When I woke up and started looking at the screen it was zooming up, so I bought the APR5 shorts for 6.87 (.37 profit). Let the long strangle go a bit longer and sold for 7.45 (.80 profit). Shoulda left that one on - it's showing at 10.45 after the close.

Too bad it was paper trading.
 
Quote from Eliot Hosewater:

I tried a double diagonal on AMZN late yesterday:

+MAY 170 Put -2.80
-APR5 175 Put +2.79
-APR5 185 Call +4.45
+MAY 190 Call -3.85

"Bought" for .59 credit.

When I woke up and started looking at the screen it was zooming up, so I bought the APR5 shorts for 6.87 (.37 profit). Let the long strangle go a bit longer and sold for 7.45 (.80 profit). Shoulda left that one on - it's showing at 10.45 after the close.

Too bad it was paper trading.
More...

Eliot,

Just curious, did you run that position through an analyzer before trading it to see where the profit/loss zones were? Or maybe you do these alot and know.

Also, what effect did IV drop have? I guess the IVs probably fell for both expirations, but since the stock moved so much, the intrinsic values were more important.

A big game in options trading - how to sell IV that you "know" will fall without getting killed by delta moves.

JJacksET4
 
Quote from newwurldmn:

This was a case of the markets being wrong. 2.5% breakeven for a 2 day strangle in AMZN seems cheap even if there weren't earnings.

Unfortunately I missed it.
More...

Yeah, it just seemed like it was too cheap. When playing with $150+ stocks that can move alot, it seems like you'd want more then $160 for the nearest strangle even for a few days.

JJacksET4
 
Quote from JJacksET4:

Eliot,

Just curious, did you run that position through an analyzer before trading it to see where the profit/loss zones were? Or maybe you do these alot and know.

Also, what effect did IV drop have? I guess the IVs probably fell for both expirations, but since the stock moved so much, the intrinsic values were more important.

A big game in options trading - how to sell IV that you "know" will fall without getting killed by delta moves.

JJacksET4
More...

I ran Thinkorswims expiration steps and it showed a pretty wide profit zone for APR5. Don't recall if i ran the vol steps. IIRC the short vols were in the 60s yesterday and the 30s this morning. I'm thinking trailing stops on each strangle might have worked out better. By the time I woke up all the sex had passed on the shorts. Looks like it didn't gap much if at all. I would have done a higher DD but it kind of tanked yesterday so I went low.
 
Quote from JJacksET4:

First the numbers - AMZN close Tues (before earnings report) : 182.30 AMZN open Wed (183.25)

So, the stock opened largely unchanged. As you would expect, long Apr strangles got clobbered...

However, AMZN wasn't exactly content to stay at the $183 price range, due to the market overall and some positive comments on the stock.

What is interesting to me about this is the idea that you take a high-flyer volatile stock and do a straddle just after it opens after earnings with the pumped up earnings IV already out, but there is still potential for the stock to move largely that day or in the coming days. Of course, in this example the Apr weeklys don't have much time so I understand that a reasonable move fairly quickly would have been necessary.

You'll often be paying up for the near term expiration the AM after the EA because IV doesn't always crash to it's lowest/final level at the open. This is even more true for anything with several weeks or more until expiration.

Just after an earnings report even after the stock opens, there is still always resonable potential for upgrades/downgrades, good or bad comments, reports from brokers like GS to say start
buying or whatever. It seems to make sense that a day like today where they had earnings the night before even thought it didn't move much was more likely to be volatile then just
any other average day for a stock like AMZN.

Any high flier stock has "the potential to move largely that day or in the coming days" so I don't see this as any kind of edge.


So, the idea again would be to watch hi flyers around earnings and if the stock doesn't move much in the AM and IV has fallen (as would be very likely) to consider buying a short term straddle/strangle. I guess one thing to take out of this is that sometimes earnings can cause a small movement, but a larger movement can actually come afterwards, and you can get in with a lower IV.

AFAIK, long staddles/strangles are tough to make money with unless you can find or stumble into enough UL's that move significantly. Double sided premium decay as well as having to overcome the premium loss on the other side is a lot to overcome.
More...
 
Quote from JJacksET4:

Volatile AMZN options:

I was just watching this (didn't do any trades), but it lead me to a thought.

First the numbers - AMZN close Tues (before earnings report) : 182.30
AMZN open Wed (183.25)

So, the stock opened largely unchanged. As you would expect, long Apr strangles got clobbered. Here are the numbers for the nearest strangle.

185 Call - Prev Close - $450
180 Put - Prev Close - $444
Cost of strangle ~ $990

185 Call - Open - $99
180 Put - Open - $70
Value of strangle ~ $170

However, AMZN wasn't exactly content to stay at the $183 price range, due to the market overall and some positive comments on the stock.

AMZN closed today at $196.63

which results in the current values shown here now (last trades this time):

185 Call - $1195
180 Put - $15
Value of strangle ~ $1200

JJacksET4
More...
It could have been a great trade, no doubt. Ha, I remember on the old yahoo boards that long straddles were one of your first areas of interest.

I think that you have to look, realistically, at what you would have done with it. What your trading plan would have been.

You assume that you open with the opening prices. Those prices and better were attainable, briefly. But you would have had to open within the first minute or two.

Otherwise, the strangle was soon out of balance with the calls moving to about 2. Then you gotta think if you had missed the opening prices, would you have ratioed the puts or looked at the 185 straddle or possibly 180/190 strangle for a balanced entry?

Regardless, once the calls started to run, the puts became less relevant and as profit increased, so did risk. So, would you have let the calls run that far or would you have closed or hedged at some point?
 
Quote from donnap:

It could have been a great trade, no doubt. Ha, I remember on the old yahoo boards that long straddles were one of your first areas of interest.

I think that you have to look, realistically, at what you would have done with it. What your trading plan would have been.

You assume that you open with the opening prices. Those prices and better were attainable, briefly. But you would have had to open within the first minute or two.

Otherwise, the strangle was soon out of balance with the calls moving to about 2. Then you gotta think if you had missed the opening prices, would you have ratioed the puts or looked at the 185 straddle or possibly 180/190 strangle for a balanced entry?

Regardless, once the calls started to run, the puts became less relevant and as profit increased, so did risk. So, would you have let the calls run that far or would you have closed or hedged at some point?
More...

Yeah, I remember the old Yahoo board days :) When I was struggling to learn "Getting Started in Options" by Michael Thomsett. Now, I can trade 8 leg options and do whatever I want to options-wise it seems with ease, but I run into the larger issue of how exactly to make money!

I understand with what you are saying. I guess the idea would be on an open where a hi-flyer like that didn't move you just close your eyes and do the trade (literally within the first minute). Then as far as letting the options run, I think the idea would be that you don't put too much money into each trade, but you attempt at least to give it reasonable time - maybe try not to watch it too carefully and just plan to close it either near the end of the day if it works as in the case shown, or have a plan b to close the next morning or possibly middle of the day depending on exactly how far you are willing to go with it.

Of course I understand there is a risk of loss, etc. but that is true on just about any trade.

JJacksET4
 
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