Earnings: IC vs Short Strangle

[dbh21]

I see many people use short strangles/straddles on this forum for earnings annoucements - but I don't understand why a Iron Condor is not used instead to limit the downside. Is it just that the strangle is a much better payout? Is there something I am missing?

I am looking at an IC for VVUS which has earnings in a week. The stock trades at $12, and the IV according to TOS for March options is 248% (following month is 150%). If I setup a 4/5/17/18 Iron Condor on March options there is a 1:2 payout for what looks like a very wide condor. The stock would have to fall/rise 50% in order to start losing. I think the IV crush after earnings would only aid this position.

Is this a bad position? What am I missing?

Thanks

 

[JJacksET4]

Quote from dbh21:

I see many people use short strangles/straddles on this forum for earnings annoucements - but I don't understand why a Iron Condor is not used instead to limit the downside. Is it just that the strangle is a much better payout? Is there something I am missing?

I am looking at an IC for VVUS which has earnings in a week. The stock trades at $12, and the IV according to TOS for March options is 248% (following month is 150%). If I setup a 4/5/17/18 Iron Condor on March options there is a 1:2 payout for what looks like a very wide condor. The stock would have to fall/rise 50% in order to start losing. I think the IV crush after earnings would only aid this position.

Is this a bad position? What am I missing?

Thanks

I don't think there is anything wrong with an Iron Condor in that situation as opposed to a short straddle/strangle. One thing is there are some people who just don't seem to want to buy options at all - they figure they are sellers and sellers have the edge (in their mind) and why would they want to buy options that (in their mind) are going to become worthless (the protection options - in your example the 4 put and 18 call.)

The only other thing though is are you sure you are using valid numbers? The reason I ask is the bid/ask spread that far out appears to be quite a bit, and if you just use nice, inbetween numbers, you might not actually be able to get them. For example, here is what I see on the prices right now:
5 Put - 21/30
4 Put - 10/18
So, for the sell 5/buy 4 part, you would only get $3 using buy at ask, sell at bid.
17 Call - 70/80
18 Call - 48/59
So, for the sell 17/buy 18 part, you would get $11 using the buy at ask, sell at bid.

The numbers would get quite a bit better if you change to for example a 5/6/16/17 spread however.

JJacksET4

 

[atticus]

The vola in the shares is FDA-related. Whoops.

 

[newwurldmn]

Quote from dbh21:

I see many people use short strangles/straddles on this forum for earnings annoucements - but I don't understand why a Iron Condor is not used instead to limit the downside. Is it just that the strangle is a much better payout? Is there something I am missing?

I am looking at an IC for VVUS which has earnings in a week. The stock trades at $12, and the IV according to TOS for March options is 248% (following month is 150%). If I setup a 4/5/17/18 Iron Condor on March options there is a 1:2 payout for what looks like a very wide condor. The stock would have to fall/rise 50% in order to start losing. I think the IV crush after earnings would only aid this position.

Is this a bad position? What am I missing?

Thanks

Short straddle and short Iron Condor are expressing two different views (though the views are similar in that they both are betting on muted volatility). What matters is the strikes you are short. If you are short wide strikes in iron condors you will have a different risk profile than if you are short narrow strikes.

Specifically regarding VVUS, earnings are irrelevant. The company doesn't even have a product yet. There is an FDA Advisory Panel soon and then an FDA decision on whether Qnexa (a diet pill for morbidly obese people) can be marketed. It's controversal for a lot fo reasons, I can explain over PM but bottom line is stay away if you don't have insight in this. VVUS could be a 5 or 25 stock... I made up the upper level.

 

[dbh21]

You are right. I was just taking the mid-point numbers that TOS gives you (I really wish it was not so optimistic).

I just finished reading a book on using options at earnings and the author paid no attention to limiting risk with ICs vs using strangles... so it made me feel as if I was missing something big. Not sure I am so comfortable with unlimited risk - especially with a biotech like this.

Thanks JJacksET4

 

[dbh21]

Quote from atticus:

The vola in the shares is FDA-related. Whoops.

Yup - Next Wednesday the FDA is reviewing their obesity drug and earnings are the week following.

Edit: I just discovered this as well...

 

[ForexForex]

Quote from dbh21:

I see many people use short strangles/straddles on this forum for earnings annoucements - but I don't understand why a Iron Condor is not used instead to limit the downside. Is it just that the strangle is a much better payout? Is there something I am missing?

Short Strangle = No insurance. OK if your stuff doesn't get stolen.

Iron Condor = Insurance. You pay a premium but if your stuff gets stolen you are usually better off than the guy without insurance.

 

[atticus]

Quote from newwurldmn:

Short straddle and short Iron Condor are expressing two different views (though the views are similar in that they both are betting on muted volatility). What matters is the strikes you are short. If you are short wide strikes in iron condors you will have a different risk profile than if you are short narrow strikes.

Specifically regarding VVUS, earnings are irrelevant. The company doesn't even have a product yet. There is an FDA Advisory Panel soon and then an FDA decision on whether Qnexa (a diet pill for morbidly obese people) can be marketed. It's controversal for a lot fo reasons, I can explain over PM but bottom line is stay away if you don't have insight in this. VVUS could be a 5 or 25 stock... I made up the upper level.

The two positions converge on greeks as the protection-strikes widen. IOW, a 75/100/125/150 Mar12 condor (in most cases) is going to be near equivalent on greeks to a 100/125 strangle. The greeks on a Mar13 85/95/105/115 condor are flat on virtually all greeks when compared to a 95/105 strangle, which will have a large mag. of gamma/theta and vega.

Adding strike width is synthetic time(or vol). As you widen it trades more like the naked position. Widen strikes to increase vol or gamma.

 

[newwurldmn]

Quote from atticus:

The two positions converge on greeks as the protection-strikes widen. IOW, a 75/100/125/150 Mar12 condor (in most cases) is going to be near equivalent on greeks to a 100/125 strangle. The greeks on a Mar13 85/95/105/115 condor are flat on virtually all greeks when compared to a 95/105 strangle, which will have a large mag. of gamma/theta and vega.

Adding strike width is synthetic time(or vol). As you widen it trades more like the naked position. Widen strikes to increase vol or gamma.

True.

I was referring to the width of the short strikes as most of the time people mention iron condors they are talking about selling wide strangles and buying wider strangles.

 

[nazzdack]

Quote from dbh21:
----earnings annoucements....
----stock would have to fall/rise 50% in order to start losing.
----IV crush after earnings would only aid this position.
----What am I missing?

Look at ticker symbol DNDN as a "reference" for what these types of stocks are capable of doing. :eek: