earnings play

[daniel5198]

What options strategy would you use if you had an estimation that a certain issue is going to move atleast 5% (no direction bias) after EA? Of course, MMs have adjusted options price accordingly. Any ideas (I've tried several strategies, none works consistently).

 

[Mikey111]

You sell a reverse ratio call spread (1 x 2 OR 1x 3, depending). So, for example you would sell 1 ATM call and buy 2 OTM calls next up the chain. Your broker should give you a net credit which should be fairly substantial. We are talking front months here with only a few days to expiry (maybe 5 or 6).
If the issue price drops you get to keep the credit as all calls expire worthless. If it rises, your ratio will ensure you benefit from the rise, if it's fairly high enough.
Risk is if the price finishes somewhere in the middle of the 2 strikes and there is also some risk of getting assigned.
Usually, you would not keep the position open for more than a day or 2.
Good luck !

 

[spindr0]

Nothing works consistently in the market... but if there was also a decent amount of horizontal skew, I'd take a look at calendar straddles/ strangles, slightly ratioed on the long side. If close to expiration and 2nd month has elevated IV, possible reverse calendar straddles/strangles, possibly ratioed as well. They take a lot of sifting to find and require a lot of attention to manage.

 

[nazzdack]

Quote from daniel5198:
----option strategy to use....
----a stock is going to move atleast 5%....
----MMs have adjusted options price accordingly.
----Any ideas....

1) Implied volatility escalation before the report.
2) Implied volatility decline after the report.
3) Those two things can aid you AND keep you out of a lot of trouble.
4) MM's merely respond to order flow, they don't arbitrarily "adjust" prices.

 

[newguy05]

Quote from Mikey111:

You sell a reverse ratio call spread (1 x 2 OR 1x 3, depending). So, for example you would sell 1 ATM call and buy 2 OTM calls next up the chain. Your broker should give you a net credit which should be fairly substantial. We are talking front months here with only a few days to expiry (maybe 5 or 6).
If the issue price drops you get to keep the credit as all calls expire worthless. If it rises, your ratio will ensure you benefit from the rise, if it's fairly high enough.
Risk is if the price finishes somewhere in the middle of the 2 strikes and there is also some risk of getting assigned.
Usually, you would not keep the position open for more than a day or 2.
Good luck !

To pay for 2x OTM call with your 1x ATM call requires you to go 2+ strikes otm with a big gap in the middle, which will increase the probability of a loser if the underlying stops in between as you said.

On the other hand if you try to narrow the gap by not going way otm, you ended up with a debit position, so if the underlying gaps in the other direction you lose the amount paid opening the position.

My favorite strategy during the meltdown was to open both legs, similar to an iron condor except load the wings heavier with 2x or even 3x vs the gut. So if the underlying gaps in either direction i have unbound profit, but if it doesnt move at all I know my risk/loss already. This combo isnt doing so well now for earning as the stocks stopped moving that much and i get killed by the bid/ask spread of all those contracts when open/close the position.

Nowdays i just stick to straddle/strangle for earning, worked much better. Pick a stock that has moved significantly to the day before earning, check the iv to make sure it's not in the stratosphere. Then close the position immediately after earning if it doesnt move, if it gaps, hold it for 1-2 days max.