Whats the reason for not doing them anymore? Do you find the edge dried up?
Directional trades prior to earnings
- Thread starter oldmonk
- Start date
there is a very important clarification to make.
any options held through an earnings announcement undergo changes in value so drastic that it is more appropriate to consider them as a second separate trade. when an earnings report is made public, options lose all their value and are only worth whatever intrinsic value they are left with after the market manipulators' reaction to the earnings announcement.
if someone implies that one can have long options that have increased in value before an earnings announcement and then proceed to hold them through the earnings event for any extra kick they are full of bovinefeces. the reality is that the volatility crush will cause options to lose all value other than intrinsic when an earnings report is made public and if your position is to make any money at all it would be purely from how deep in the money it ends up at. you can either cash out any profits you might have made on long options before an earnings announcement, or you can put all that value at risk of it being lost in its entirety to see if your directional position ends up being so big a winner from the reaction to the earnings report that you end up with a positive profit; but there's no way to add together both the before and after earnings value that options might have.
any options held through an earnings announcement undergo changes in value so drastic that it is more appropriate to consider them as a second separate trade. when an earnings report is made public, options lose all their value and are only worth whatever intrinsic value they are left with after the market manipulators' reaction to the earnings announcement.
if someone implies that one can have long options that have increased in value before an earnings announcement and then proceed to hold them through the earnings event for any extra kick they are full of bovinefeces. the reality is that the volatility crush will cause options to lose all value other than intrinsic when an earnings report is made public and if your position is to make any money at all it would be purely from how deep in the money it ends up at. you can either cash out any profits you might have made on long options before an earnings announcement, or you can put all that value at risk of it being lost in its entirety to see if your directional position ends up being so big a winner from the reaction to the earnings report that you end up with a positive profit; but there's no way to add together both the before and after earnings value that options might have.
Last edited:
Everybody on this site is fully aware of option "volatility crush" after earnings.
If a trader thinks the underlying will move enough after earnings to offset the option premium then going long would be the trade. BUT due to the expense of a straddle/strangle the trader will most likely have to pick a direction and go with calls or puts - not both.
First you have to get a list of upcoming earnings announcements. Then you delete low priced stocks as well as those where you don't want to deal with assignment if things blow up (GOOG at $1,200 anyone?). Next, remove those whose average IV trades below a certain threshold (low beta stocks) because there won't be much IV expansion in them. The next stop is a look at the EOD option chains, one by one. If the B/A spread is Holland Tunnel wide, it's on to the next stock.
After awhile, you get a feel for what will be in the ball park. If you find one, plug the option quotes into the option program. At the same time, look at the IV chart at IVolatility to see what previous contractions have been and also look at the option chain again, using both to derive a guesstimate of where IV will contract to. Now it's back to the program and see what the graph looks like. If the ratio is close to 3:1 then enter that lower post EA IV guesstimate and see what the graph looks like for the morning after the EA.
If that R/R and is still attractive, it's time to set up orders on the platform.
An Iron Condor can be set up as a single trade, as a pair of verticals and as a pair of strangles. Diagonalizing just changes the type of combo order. The obvious step is to place the IC order at your desired price. Maybe it's just my experience but better fills on 2 legged combos occur far more often than on those with more legs. Because people often bid one combo up (or down), you can often leg in for a better price.
Because the body sells for much more than the wings cost, if working via the strangle entry, work the body for a better fill because there's less to be gained from working the wings strangle.
Now price moves during market hours. So that means setting price alerts on each combo and then as prices change, triggering the price alerts, they all have to be reset again and again.
And no, I don't know much about the Greeks, nor did I care. This was all about a price set up. It was either there or it wasn't.
By now, are you sorry that you asked
? Are you as tired of reading this as I am of all of the effort that went into this process? Perhaps someone with the technology to make this a more efficient screening process could make an easier go of it but after many years of doing this, I have moved on to less time consuming adventures since I no longer need or want to be as aggressive as I was when I was a mere lad 
.First you have to get a list of upcoming earnings announcements. Then you delete low priced stocks as well as those where you don't want to deal with assignment if things blow up (GOOG at $1,200 anyone?). Next, remove those whose average IV trades below a certain threshold (low beta stocks) because there won't be much IV expansion in them. The next stop is a look at the EOD option chains, one by one. If the B/A spread is Holland Tunnel wide, it's on to the next stock.
After awhile, you get a feel for what will be in the ball park. If you find one, plug the option quotes into the option program. At the same time, look at the IV chart at IVolatility to see what previous contractions have been and also look at the option chain again, using both to derive a guesstimate of where IV will contract to. Now it's back to the program and see what the graph looks like. If the ratio is close to 3:1 then enter that lower post EA IV guesstimate and see what the graph looks like for the morning after the EA.
If that R/R and is still attractive, it's time to set up orders on the platform.
An Iron Condor can be set up as a single trade, as a pair of verticals and as a pair of strangles. Diagonalizing just changes the type of combo order. The obvious step is to place the IC order at your desired price. Maybe it's just my experience but better fills on 2 legged combos occur far more often than on those with more legs. Because people often bid one combo up (or down), you can often leg in for a better price.
Because the body sells for much more than the wings cost, if working via the strangle entry, work the body for a better fill because there's less to be gained from working the wings strangle.
Now price moves during market hours. So that means setting price alerts on each combo and then as prices change, triggering the price alerts, they all have to be reset again and again.
And no, I don't know much about the Greeks, nor did I care. This was all about a price set up. It was either there or it wasn't.
By now, are you sorry that you asked
LOL is does sound daunting, however if it worked maybe think about packaging it in a course and selling it for some good money (many retail traders looking to just break even). I also agree that this might not totally be automated but there are definitely more efficient ways of doing this. When trading IC did you find legging as 2 vertical spreads or 2 strangles to be more efficient? I am always looking for ways to get better fills. Thanks Spindr
Take a look at orats or a similar service that offers a vol database. The problem with simply buying calls or puts is your delta. Hedging with shares simply results in a synthetic straddle. Buying a single call and hedging with -50 shares results in a half-lot long straddle.
The simple truth is that each stock is different.
Many stocks are suitable for straddles, but you really need to do your homework to know which stocks to use, when to buy and at what price. Yes, some stocks have a clear pattern of moving up before earnings, but don't forget that the overall market has been moving up in the last 9 years, so it's not surprising that many stocks follow the pattern.
Straddles are much safer play (assuming you sell before earnings) because you don't care which direction the stock and more importantly, the market is moving.
And yes, CML Trade Machine can be a very useful tool. Here is a discussion about it:
CMLviz Trade Machine
Many stocks are suitable for straddles, but you really need to do your homework to know which stocks to use, when to buy and at what price. Yes, some stocks have a clear pattern of moving up before earnings, but don't forget that the overall market has been moving up in the last 9 years, so it's not surprising that many stocks follow the pattern.
Straddles are much safer play (assuming you sell before earnings) because you don't care which direction the stock and more importantly, the market is moving.
And yes, CML Trade Machine can be a very useful tool. Here is a discussion about it:
CMLviz Trade Machine