peng, a ratio of 3, is that in regards to your position size? 3 on the front month to 1 on the back month?
Earnings Volatility Plays
- Thread starter maninjapan
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Quote from spindr0:
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.
yeah, Ive been working with the back trader function of Optionvue. Ive actually been toying around with the lead up to earnings. I have a question though, pre earnings you would expect the gap between the front month and the far month to increase right? With a straight calendar you would expect to profit from an increase in IV, but with the front month often increasing so much, would you buy the front month and sell the far month (reverse calendar)at a ratio (far month having higher vega, you would need to buy more of the front month). However that runs contrary to what you posted above. So I think Im not getting something here.....
OptionVue has gotten better over the years with their historical data but there is still a lot of holes in it --- in particular how to treat the b/a option spread. If you want to test this trading idea, or variations thereof, the best way is paper trade current possible positions and be conservative with where you can execute the various ratioed spreads.
Spin's summary of this/these trading ideas is a mouthful and the only way to get a feel for the strategy is to get your feet wet. You can analyze the greeks until the cows come home but until you start putting possible transactions on a risk graph and analyze the before/after of the IV collapse and gamma risk, you're just spinning your wheels. The success of many of these types of trades depends upon execution, post event IV estimation, and your understanding of the how the underlyng trades as you close out the position.
cheers beb, yep, I agree, running it in real time is the best way to get a feel of it. Im more just trying to get a better understanding of the different trades available at the moment.
What are your thoughts on the idea of a ratio reverse leading into earnings to profit from the increase in the IV spread between near and far month? Is this a legitimate play? Or is a regular calendar with a few extra contracts on the far (buy) side a more common way to play it? I know Im asking a lot of questions here guys, but please bear with me. It is much appreciated and the light is starting to come on (albeit slowly)
What are your thoughts on the idea of a ratio reverse leading into earnings to profit from the increase in the IV spread between near and far month? Is this a legitimate play? Or is a regular calendar with a few extra contracts on the far (buy) side a more common way to play it? I know Im asking a lot of questions here guys, but please bear with me. It is much appreciated and the light is starting to come on (albeit slowly)
Yes, pre earnings you would expect the gap between the front month and the far month to increase. But that's not a good reverse candidate unless the IV of later months increases as well.
Regarding buying more front month, in general, if it has increased so much, why would you want to buy a more of what is going to collapse in a day or two?
But more to the point. What you think makes sense isn't always reality. It's the relationship b/t IV inflation, skew time and price that determines the risk graph. You need to analyze a number of these see what works. I've seen some where the ratio can be higher, lower and even mixed:
-13/10/10/-11
- 9/10/10/ - 8
-11/10/10/- 9
There's just no etched in stone answer.
I've never done double reverses more than 10 days or so before expiration. The nearer to expiration, the better. Thurs PM or Fri Am EA before that Friday's expiration can be a little scary (it all shakes out that day) but the near month loss premium is way less, particularly for strangles.
Sorry, didnt really explain what I was trying to do very well.
go long the front month, go short the far month 10 days or so before EA, with ratio to the front side to cover the vega. then close it out 1 or 2 days before EA.
Starting to think it doesnt work too well though....
I don't mean to speak for bebpasco but if my recollection is correct, we both said HUH? when we first read about reverse calendars on Yahoo 4-5 years ago, courtesy of IV_Trader. It made no sense then and yet they do.
And to add minimally to what beb said, legging out the AM after the EA is a whole nuther topic. For the umteenth time, you have to model a bunch of these to see the possibilities.
A mouthful, eh ???
Spindr, thanks for sticking with me on this, it is all starting to sink in, I actually meant looking at a few trades modelled on past data, Im starting to think they dont really work, or at least havent identified the right environment for it to work....
like you said might make sense in your head, but in reality......
like you said might make sense in your head, but in reality......
Quote from spindr0:
I don't mean to speak for bebpasco but if my recollection is correct, we both said HUH? when we first read about reverse calendars on Yahoo 4-5 years ago, courtesy of IV_Trader. It made no sense then and yet they do.
And to add minimally to what beb said, legging out the AM after the EA is a whole nuther topic. For the umteenth time, you have to model a bunch of these to see the possibilities.
A mouthful, eh ???
So Born is IV Trader? I wonder who else is here from the old Yahoo board under a different ID? lolol!
I thought about his IV expansion trade strategy last year as IV was going thru the roof. At first, I thought he making a fortune --- and probably still did. But it must have been a slippage nightmare adjusting those positions back to delta neutral.