Calendar spread value relative to IV

Sakti said:
Just to clarify, are you shorting credit spreads on the front month option after earnings, with strike being the break even points?
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No. An example would be a one week calendar spread on a stock where earnings are Thursday (Week 1) after the close. I'm looking to buy week2 and sell week1. Week 1 might be 80 and week 2 might be 55. That does not make it good on it's own, because if the stock moves too much, with both being maybe 45 after, you need a tight range to make money. You need to have an expectation of where you think the stock will go after earnings and what vol will be on week 2. Let's say 45 after. I can use my platform and simulate a 45 vol on both, then I can move the stock price to see where I start to lose money in the simulation.

Since at this time I do all my trading in my Roth IRA, I can't sell these spreads. When I traded professionally I did both. It is the same analysis.
 
1245 said:
No. An example would be a one week calendar spread on a stock where earnings are Thursday (Week 1) after the close. I'm looking to buy week2 and sell week1. Week 1 might be 80 and week 2 might be 55. That does not make it good on it's own, because if the stock moves too much, with both being maybe 45 after, you need a tight range to make money. You need to have an expectation of where you think the stock will go after earnings and what vol will be on week 2. Let's say 45 after. I can use my platform and simulate a 45 vol on both, then I can move the stock price to see where I start to lose money in the simulation.

Since at this time I do all my trading in my Roth IRA, I can't sell these spreads. When I traded professionally I did both. It is the same analysis.
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That's similar to what I do, except I usually start earlier than one week before expiration, and usually do double calendars. If I have a strong feeling of direction, I would put on an OTM single calendar. Right now, I have such a position on AMZN, as I have been bullish on that stock.
 
trilogic said:
philosophical question , thnx
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On a pragmatic level it's because fewer people look at volatility as an asset. With a few thousand optionable stocks in the US alone there are opportunities that evade the net of larger players or market makers. On a deeper philosophical note, it is pretty obvious that trading volatility (unlike directional trading) has zero social value :)

On a practical note, there are many ways to skin this particular cat depending on you think is mispriced - the move, the vol decay (that is, term structure) etc. The main reason I advocate KISS style here is since the strategy is inherently statistical, the transaction costs are going to strongly contribute to your bottom line.
 
Kibitzer said:
That's similar to what I do, except I usually start earlier than one week before expiration, and usually do double calendars. If I have a strong feeling of direction, I would put on an OTM single calendar. Right now, I have such a position on AMZN, as I have been bullish on that stock.
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I'm almost never able to hold back, so I start a few days before the event. I like to have at least 25% of my size on the first trade, then I bid lower and lower hoping for Ivol to move around and get hit. The reality is that I would have done better over time by waiting until around 3pm ET on the last day before the event to enter my size. I don't like relying on the last 15 min.
 
sle said:
On a pragmatic level it's because fewer people look at volatility as an asset. With a few thousand optionable stocks in the US alone there are opportunities that evade the net of larger players or market makers. On a deeper philosophical note, it is pretty obvious that trading volatility (unlike directional trading) has zero social value :)

On a practical note, there are many ways to skin this particular cat depending on you think is mispriced - the move, the vol decay (that is, term structure) etc. The main reason I advocate KISS style here is since the strategy is inherently statistical, the transaction costs are going to strongly contribute to your bottom line.
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Thank you, to continue. Why can anyone outside of having "information" of course, know if vol is mis priced, be it the move of VOL , the decay of term or otherwise ?

Even with 100 years of data, you or anyone really ( not specifically you) "trading" maybe for more or less 20 years AND probable at multiple shops with a marginal OVERALL % return record make any such statements?

My experience is that the more complicated the option structure the more BS wiggle room it "entitles" the brain that put it on when wrong to blame some obscure greek
 
IMO you can't tell in advance if VOL is mis priced, same way you can't tell if the stock is going up or down... the move afterwards defines the correct vol...

Just before earnings, as a market maker we used to be long front straddle short front strangles.... in essence a short butterfly... and short the next 1 or 2 months in vega. And make sure the 20% up/down moves are okay in risk.

So have a little bit of gamma and be short the immediate vega... buy it back on the way down...

Usually that works...
 
trilogic said:
thnx, were you long "inventory" of the underlying or are you saying this is a outright strat ?
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I meant options market maker, not market maker in the underlying... so we never had any underlying inventory, only as a hedge...

As an options market maker you tend to have the opposite positions of the rest of the market... so risk management wise you'll want as limited positions as possible. But you always end up with some kind of position (vega/gamma). You then have to decide which position you actually want... So, yeah... more of an outright strat.

With positions in every strike available, you look at the general/overall position. Gamma and vega and specifically in which month is the vega is important especially with earnings coming up...

The opposite position (not talking about a specific strike here) of vega long, gamma short only works if the stock doesn't move on earnings and your'e quick enough to sell your vega, which is impossible when earnings are released pre-market open and the implied vols will already be lower when the market opens...
 
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