The problem with that idea is that the IV of near term options inflates severely prior to the earnings announcement. The ATM straddle for TSLA for 5/04 costs about $25 with an IV that's about 50% higher than later weeks. With the EA in the PM, break even will be about +/- $20 or so early Thursday morning. TSLA can certainly move that much and more but $20-25 is a lot to achieve with less than two days of time remaining - not much room for error.
Directional Trading and Options and Straddles
- Thread starter Tradernow989
- Start date
The problem with that idea is that the IV of near term options inflates severely prior to the earnings announcement. The ATM straddle for TSLA for 5/04 costs about $25 with an IV that's about 50% higher than later weeks. With the EA in the PM, break even will be about +/- $20 or so early Thursday morning. TSLA can certainly move that much and more but $20-25 is a lot to achieve with less than two days of time remaining - not much room for error.
Robert Morse
Sponsor
I totally agree that TSLA options are expensive. Doing vertical spreads on both sides would help reduce the cost at the expense of reduced profits in case of a big move.
TSLA is reportedly the most shorted, and one of the most followed stock right now. A lot of bears are betting big, with some buying Jan 2019 puts at strikes below $100 or even $50.
For next week, however, the fact that TSLA has managed to stay above or close to $300 for so long despite its well-known, miserable fundamentals is giving me pause in trying to bet big on the down side. With so many large institutional TSLA holders writing options against their holdings, I suspect a $30-$40 drop is the most a bear can hope for. There is allegedly a shortage of shares for shorting. If so, I wouldn't be surprised if a short squeeze is engineered to screw the retail shorts.
TSLA straddle suggested in the previous posts is a great example how NOT to use the straddle strategy. If you entered the straddle on Wednesday close, you would be down 34% the next day.
The reason is that the straddle implied almost 8% move, while in reality the stock moved only 5.5%. Same would be true for AMZN (34% loss) and many other stocks - on average, options are overpriced before earnings, and the actual move is less than the implied move. IV collapse will result a significant loss in the straddle price if the stock doesn't move enough.
Here is the history of straddle performance held through earnings for TSLA:
As you can see, in some cases the losses can exceed 70%.
One great way to use straddle is buying it 1-3 weeks before earnings, but not holding through earnings. In this case you have both vega and gamma working for you.
You can read about this strategy in How We Trade Straddle Option Strategy article. The strategy has very low risk and ~80% winning ratio.
The reason is that the straddle implied almost 8% move, while in reality the stock moved only 5.5%. Same would be true for AMZN (34% loss) and many other stocks - on average, options are overpriced before earnings, and the actual move is less than the implied move. IV collapse will result a significant loss in the straddle price if the stock doesn't move enough.
Here is the history of straddle performance held through earnings for TSLA:
As you can see, in some cases the losses can exceed 70%.
One great way to use straddle is buying it 1-3 weeks before earnings, but not holding through earnings. In this case you have both vega and gamma working for you.
You can read about this strategy in How We Trade Straddle Option Strategy article. The strategy has very low risk and ~80% winning ratio.
Straddles will only work a somewhat very small fraction of the time. -- and somewhat rightfully so.
If they worked all the time...everyone would essentially just be printing money by playing both sides of the market. and real life is not quite as easy and simple.
Don't think of trading...as merely, just....somewhat automatic "strategies"...but rather as a collective skill, and approach and wisdom.
I'm a long/directional player or buyer, but I'm very open-minded and malleable and dynamic in my approach....each new day, or each new trade.
I hate words, I like to just get to the direct bottom line of things,
Kim, do you make 5% a week with real money...with your options training or service or website or whatever your deal is,
Theory and real world can sometimes vastly be different, or actually play out variously.
If someone has truly great prediction and/or management capabilities...they can somewhat easily make 5% a Day being directional with an option...and I'm being somewhat modest and conservative with that number.
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I heard this argument before. Someone declared iron condors dead in 2007 because everyone is using them. Guess what? 11 years later, people still make very good gains with iron condors.
It's all about risk management.
The straddle strategy I mentioned - we have been using it for 7 years now, and it still works very well. But you need to know how to use it: which stocks to use, when to enter, when to adjust or exit etc.
Lets take a look at 2017 statistics for this strategy:
- Number of trades: 77
- Number of winners: 62
- Number of losers: 15
- Winning ratio: 80.5%
- Average return per trade: 5.1%
- Average return per winning trade: 8.7%
- Average return per losing trade: -10.2%
- Average holding period: 7.2 days
Absolutely. Any strategy (including our straddles) can produce some occasional big winners. What matters is what is the overall return and what is the risk.
Our straddle strategy is producing 5% average return including the losers, and it rarely loses more than 7-10% with 80% winning ratio. Can you say the same about any directional trading strategy?
Buying a straddle a few weeks before the EA has two advantages.
(1) The increase in IV will offset some decay and
(2) you might get some underlying price change and straddle gain.
Being long a straddle through earnings is swimming upstream against the IV contraction and that makes no sense unless there are some offsetting short positions.