Delta-gamma neutral, long vega trade

Quote from dmo:

That's fine when it works. But what if you had shorted Dendreon (DNDN) straddles prior to a big drug announcement a few years ago when it was around 4 dollars. When the announcement came out it gapped up to 12 and a few days later topped out at 25. Ouch!



Depends how they played it, but big spikes in volatility can be hard on market makers because they're the ones selling all that volatility as it's going up. It's their job to make markets and if the world is buying, they're selling. Maybe Xflat can chime in with an equity MM perspective on that.
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But when the scandle news hit, IV should go down, b/c now there's no uncertainty...everyone's trying to get out. So, if the MM's short IV, they should make money. Right?

Do you think I have the beginnings of a good options trader?

Like this song: http://www.youtube.com/watch?v=gmeDln0xjyE&feature=related
 
Quote from DarkProtoman:

But when the scandle news hit, IV should go down, b/c now there's no uncertainty...everyone's trying to get out. So, if the MM's short IV, they should make money. Right?
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Didn't the stock drop from about $25 to zero in a few weeks? Doesn't sound to me like a fun time to be short volatility.
 
Quote from dmo:

Didn't the stock drop from about $25 to zero in a few weeks? Doesn't sound to me like a fun time to be short volatility.
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Scratch that...I'd just buy up all the calls and puts, and hedge by shorting the stock. Then I should make a pretty penny from the surge in IV.
 
I read the Yahoo message boards. LOL, a real circus. Anyhow, many traders there put straddles on ARNA, Arena Pharmaceuticals, for their announcement Monday. Obesity-wonder drug. Easy money right? I checked it out on IB (hell I want to make easy money too), I think IV was 200% higher than historic.

Sure enough, report comes out, turn out it isn't a blockbuster drug right off the bat....

Calls down 90%, puts barely move.

A short straddle would have worked, definitely.

On the flip side, if they met the 5% criteria for fat loss or whatever metric it was that they missed.....stock would have jumped to $10 easy (was $4) and you'd be screwed.

No free lunch for me.

I'm a rookie, but I think that for pharmas, you'd have to be johnny on the spot for announcements of upcoming trial data releases and then enter spreads ASAP...otherwise IV shoots and you don't have a shot.


* optionslam.com is a website all about straddles before earnings. Optionetics website also has a straddle talk forum, good information there. They have threads from 2-4 years ago of people doing this strategy.
 
Quote from kroponer:

I read the Yahoo message boards. LOL, a real circus. Anyhow, many traders there put straddles on ARNA, Arena Pharmaceuticals, for their announcement Monday. Obesity-wonder drug. Easy money right? I checked it out on IB (hell I want to make easy money too), I think IV was 200% higher than historic.

Sure enough, report comes out, turn out it isn't a blockbuster drug right off the bat....

Calls down 90%, puts barely move.

A short straddle would have worked, definitely.

On the flip side, if they met the 5% criteria for fat loss or whatever metric it was that they missed.....stock would have jumped to $10 easy (was $4) and you'd be screwed.

No free lunch for me.

I'm a rookie, but I think that for pharmas, you'd have to be johnny on the spot for announcements of upcoming trial data releases and then enter spreads ASAP...otherwise IV shoots and you don't have a shot.


* optionslam.com is a website all about straddles before earnings. Optionetics website also has a straddle talk forum, good information there. They have threads from 2-4 years ago of people doing this strategy.
More...

That's why I only plan on doing short straddles when I'm a professional for a market-making firm...then I'd have quick access to research, and extremely fast equipment.

Did anyone like the music I posted?
 
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