Earnings Volatility Plays

[spindr0]

Quote from maninjapan:

Which would be the more common trade though, going long IV a couple of weeks leading upto EA and closing out just before? Or getting on short IV just before EA and closing out just after the announcement?

I was thinking that calendar ratios meant setting the ratios to be Vega neutral, is this not the case??

On ET I read a lot of "The only way to do that is X or the best way to do that is Y." I think the answer is that the best way is what works for you.

In a perfect world you'd want to go long further month IV a couple weeks before the EA, ride the IV up and if lucky, catch some directional move. Then you'd want to short near month IV just before the EA. In reality, you have several weeks of time decay to fight and you never know how much expansion you're going to get. Since I don't have a lotta luck finding that perfect world, I look for set ups where all prices today result in a shifted risk graph that has a better than average expected profit. Lots of moving parts, lots of sifting.

As for the vega thing, I'm not that guy. I like pretty risk graph pictures

 

[spindr0]

Quote from pengw:

The field you need use is called IV Ratio, see attached image.

By default the IV ratio is 3, what it means is, change of IV in the back month is only 1/3 of change of IV in the near month.

For example, Before ER, IV is 90% for Sep options and 60% for Oct options, if IV ratio is set to 3, then after ER, if Sep IV drops from 90% to 60%, then IV for Oct will drop from 60% to 50%.

Peng, Does your rogram have the ability to select a post EA IV number for each month, independent of each other?

 

[acen1975]

Quote from pengw:



( With Calendar ratio backspread, you are shorting the front month, so the bigger the drop, the better and the front month IV always drops more than the back month IVs )

you are shorting IV with long calendar

even if the front IV drops more than the back month,let me remind you that the VEGA of the back months options would be still higher,than the front......
and the spread is usually a loser.
back month options have more premium,so vega would be higher,even if IV has a smaller drop in the back month,the vega will crush your long options more ,than your shorts.

this is the first time i have heard that someone is shorting IV with a long calendar......
any position or spread,which is a debit bet,is LONG IV,not short!

correct me ,if i am wrong

 

[pengw]

Quote from acen1975:

you are shorting IV with long calendar

even if the front IV drops more than the back month,let me remind you that the VEGA of the back months options would be still higher,than the front......
and the spread is usually a loser.
back month options have more premium,so vega would be higher,even if IV has a smaller drop in the back month,the vega will crush your long options more ,than your shorts.

this is the first time i have heard that someone is shorting IV with a long calendar......
any position or spread,which is a debit bet,is LONG IV,not short!

correct me ,if i am wrong

Please see attached image.

 

[dagnyt]

Quote from pengw:

(With Calendar ratio backspread, you are shorting the front month, so the bigger the drop, the better and the front month IV always drops more than the back month IVs )

This makes no sense.

You call it a ratio backspread. That means you buy more options than you sell. But you are selling the cheaper option and buying a larger quantity of the more expensive option???

Are you sure that's what you are doing? You are loading up on vega when you know vega is going to get crushed.

This can't be a winning play.

Mark

 

[dagnyt]

Quote from acen1975:



correct me ,if i am wrong

Youa re not wrong.

What's wrong is the idea of using Options Lab.
Even it's proponents don't understand how it works.

Mark

 

[pengw]

Quote from spindr0:

Peng, Does your rogram have the ability to select a post EA IV number for each month, independent of each other?

You can specify different IVs for each leg before ER,
the IVs for each leg depends on the ratio you set.

See attached two images, one is for before ER, one for after.
Note the changes in the Impl. volatility columns.

 

[pengw]

Image for after ER

 

[pengw]

Quote from dagnyt:

Youa re not wrong.

What's wrong is the idea of using Options Lab.
Even it's proponents don't understand how it works.

Mark

Mark,

The strategy is a long Vega, long theta play,
but it does not mean any drop in the back month will hurt the position as long as the front month IV drops more,

see below ?, the combined IV is gaining and it is only based on ratio 3. I have seen several cases where front month IV dropped below back month IV, which I considered as bonus.

before ER after ER
(-90 + 70) < (-70 + 63)

 

[pengw]

Quote from maninjapan:

peng, thanks for the post, the strategy you refer to, a calendar ratio backspread, does that refer to having the larger number of contracts on the far month?

Yes, and with higer strike. You need liquid options to trade CRB.
We only choose the most volatile stocks to trade.
I remeber the day when FLSR's front month IV dropped from 270% to120%, back month IV drop from 180% to 110% while far back month IVs barely budge.