Earnings Volatility Plays
- Thread starter maninjapan
- Start date
well,then rengw has problems with the terminology......cause calendar is not really the same as diagonal
and diagonal is not a good strategy in that case too.......very expensive and very risky....if the spread is balanced with net short vega,than even the slightest move in the underline will offset the the IV gains.........this is a highly theta positive play,nothing close to IV bet......
still at least,it has a chance not to be a loser if IV falls,as the calendar will be for sure
peng, (or anyone else who feels like chipping in) what do you use to calculate the ratio? IS it just trial and error? Or do you base it on previous movements or something similar?
Just so we're on the same page, I have used simultaneous ratioed CRB's for earnings plays. I see them referred to as double diagonals and calendar stangles/straddles. I don't care what you call them as long as we're talking about the same beast.
They can be standard (sell near month) or reversed (sell further month). Generally, the standard ones involved buying more long legs and the reversed positions generally involve selling more short legs. And they're usually unbalanced in order to achieve a desired risk profile.
The process involves several components. Near term IV has to be inflated. There has to be horizontal skew (I prefer more than 15 basis pts). A historical pattern of IV contraction is nice but as IV_Trader mentioned and previously discussed, it's of no use now due to last year's market fall and wild IV inflation.
You can just look at the big names (ala AAPL, ISRG, GOOG, etc.). A more comprehensive screening of the list of upcoming EA's takes a lot of leg work... or mouse work. Unless you have access to sophisticated database (fee?) or are adept at programming, it helps if you work in collaboration with someone else.
As to your question, how do you determine the ratio? I plug the strategy into my 2 bit modeling program and graph the position. Perhaps start with a 10/-10/-10/10 position. If it meets certain criteria, it goes forward. Increasing the number of long or short legs alters the risk profile (see bebpasco's RIMM trade). When you find an acceptable one, you're good to go. Then it's only a question of trying to get a better fill via combo orders or legging in.
At some point you're going to have grind out some of these on paper or in a simulator. All the talk in the world isn't going to give you real world insight into how these perform or whether they're suited for your trading. It's a time consuming process to evolve trading strategies and this is certainly one of them.
Quote from acen1975:
well,then rengw has problems with the terminology......cause calendar is not really the same as diagonal
and diagonal is not a good strategy in that case too.......very expensive and very risky....if the spread is balanced with net short vega,than even the slightest move in the underline will offset the the IV gains.........this is a highly theta positive play,nothing close to IV bet......
still at least,it has a chance not to be a loser if IV falls,as the calendar will be for sure
I guess you still didn't bother to look at the chart I posted,
where does the short vega come from ?