Earnings: IC vs Short Strangle

Quote from babutime:

I've never tried this strategy, but would a Double Diagonal make sense in this case? Sell front month vol and buy back month vol?
More...
That depends on how inflated the back month is.
 
Quote from babutime:

Hey, a recent example would also be AAPl too. The recent earnings had an expected move of $35 and actually moved around $34. My ICs on paper trade made a handsome profit.

I wonder if PCLN this monday is priced in correctly. I've never tried this strategy, but would a Double Diagonal make sense in this case? Sell front month vol and buy back month vol?
More...

My experience has been that they are generally priced slightly richly. Just traing earnings at random won't be a profitable strategy. But some 70 percent of the variance in a typical stock comes from earnings so they are important.

What's a double diagonal? Often the terminology that I use and others is different.
 
Quote from newwurldmn:

My experience has been that they are generally priced slightly richly. Just traing earnings at random won't be a profitable strategy. But some 70 percent of the variance in a typical stock comes from earnings so they are important.

What's a double diagonal? Often the terminology that I use and others is different.
More...

I agree with that earnings trading isn't always profitable, but this one makes approximately 10% moves every earnings mostly to the upside (for the past 8earnings quarters)

A double diagonal is where you sell the front month elevated vol straddle and buy the back month depressed vol straddle at slightly cheaper strikes. Going into the trade your delta is approx 0. But this is a vol play, will that even matter? Or is gamma and vega more important to neutralize with that setup?

Quote from spindr0:

That depends on how inflated the back month is.
More...

So yeah if the back month is much cheaper the drop in front month vol in this case the weeklies should provide some premium and the rise in straddles from the back month will offset the loss from one of the shorts being ITM.

I'm waiting for one of you guys to throw in a second order sensitivity issue with regards to this strategy and send me back scouring to read more...

The directional bias is to the upside (has been for the past 7 out of 8 earnings). So might write a few puts deep OTM money- way past the expected moves which, in this case of PCLN, has usually been priced pretty accurately at earnings. Plus the fact that there's only 3 more days after earnings to the weeklies expiration makes it not so risky even if it goes against me.

Or maybe there's some other strategy I need to look into?
 
Quote from newwurldmn:

What's a double diagonal? Often the terminology that I use and others is different.
More...
A pair of calendars. Or a pair of strangles (different months). Or a straddle and a strangle (different months). Or an iron condor (diagonalized). Or a butterfly that's not a butterfly because the short strikes in the center are different :)
 
Quote from babutime:

So yeah if the back month is much cheaper the drop in front month vol in this case the weeklies should provide some premium and the rise in straddles from the back month will offset the loss from one of the shorts being ITM.... there's only 3 more days after earnings to the weeklies expiration makes it not so risky even if it goes against me.
More...
Not exactly. The losing side of the straddle is a drag on the winning side plus both sides have contracting IV. In addition, the delta of the short ITM leg is rising much faster. A big move can hurt.
 
Also, use a risk graph and play with ratioing the legs. If the stars align nicely, sometimes you can find a nice "W" curve where the profit peak in the center is twice the max loss on the wings.

Exiting these after the EA is somewhat of an art as well. Many are profitable in the AM and show losses by closing because of the nature of the different IV contractions in the AM.
 
Quote from spindr0:

Not exactly. The losing side of the straddle is a drag on the winning side plus both sides have contracting IV. In addition, the delta of the short ITM leg is rising much faster. A big move can hurt.
More...

Edit:

Just read your second post.

I was gonna say maybe choose a direction and go far OTM but I guess that is still extreely risky...
 
Quote from babutime:

I was gonna say maybe choose a direction and go far OTM but I guess that is still extreely risky...
More...


But very rewarding :)


Screenshot-1.png
 
Quote from babutime:

I agree with that earnings trading isn't always profitable, but this one makes approximately 10% moves every earnings mostly to the upside (for the past 8earnings quarters)

A double diagonal is where you sell the front month elevated vol straddle and buy the back month depressed vol straddle at slightly cheaper strikes. Going into the trade your delta is approx 0. But this is a vol play, will that even matter? Or is gamma and vega more important to neutralize with that setup?



So yeah if the back month is much cheaper the drop in front month vol in this case the weeklies should provide some premium and the rise in straddles from the back month will offset the loss from one of the shorts being ITM.

I'm waiting for one of you guys to throw in a second order sensitivity issue with regards to this strategy and send me back scouring to read more...

The directional bias is to the upside (has been for the past 7 out of 8 earnings). So might write a few puts deep OTM money- way past the expected moves which, in this case of PCLN, has usually been priced pretty accurately at earnings. Plus the fact that there's only 3 more days after earnings to the weeklies expiration makes it not so risky even if it goes against me.

Or maybe there's some other strategy I need to look into?
More...

What is your view on PCLN and what is the maket pricing?
Second order greeks are relevant but not necessary to model because it's a gap move and you can just remodel the option.
 
You must log in or register to reply here.
Back
Top