Event driven volatility

B

billb2112

I was reviewing some of the advanced strategies in one of my options books and came across a box spread. Now I've read about them before, but for some reason, an idea popped into my head and I have no idea if it's a good or bad idea.

Anyway, earnings seem to push up volaitility on a security. Has anyone ever used that to their advantage w/ options? My thoughts were to do a box spread (buy put and call at same strike price) and profit from the one that moves the most. I was also thinking that since volatility will increase the option will become "expensive" and the option that is moving in the right direction will far outweigh the premium paid for the option moving in the wrong direction.

Of course, I'd like to do this on a volatility measurement that is relatively low to take advantage of the spike.

And lastly, there's always the chance that earnings are in line and the stock doesn't budge, then you're out premium on both sides.
 
Quote from billb2112:

My thoughts were to do a box spread (buy put and call at same strike price) and profit from the one that moves the most.
More...

my friend I think you mean a straddle
 
Several options I watched on earnings report day seemed to peak about 25 minutes after earnings were released or 25 minutes into the company's conference call. You had to be quick to catch them. They quickly dropped back down after the peak.
 
Very difficult to be profitable this way unless you are forecasting earnings reports that are way off such that you expect a large move. This is because options premium increase prior to earnings release. The majority of the time you pay too much premium and implied volatility falls off after earnings release.
 
Quote from dottom:

Very difficult to be profitable this way unless you are forecasting earnings reports that are way off such that you expect a large move. This is because options premium increase prior to earnings release. The majority of the time you pay too much premium and implied volatility falls off after earnings release.
More...

Then sell a spread.
 
Quote from aphexcoil:

Then sell a spread.
More...
Also very difficult to do because you set yourself up for those 1-in-10 (or whatever the % is) news releases that do cause a major move that wipes out all the small wins from other 9-of-10 successful writes.

Also, you are looking at a small holding time to take advantage of temporary increase in option premium prior to news release. What happens is your transaction cost will usually be more than the profits you make in decreased option premium in a short period of time. Remember, you're losing to the spread on the way in, on both legs, and then pay it again on the way out.

In other words, there is no "easy edge" here.

btw, in a similar options thread I posted that I could predict a minimum of 1.2% move in S&P, DJIA or OEX index with 78% accuracy and no one could come up with a profitable way to exploit it. Straight straddle? You don't make enough being long delta unless you have a real significant move. I can reverse the model and predict days the indexes are < 0.8% move, but if you go short delta and vega but will lose because of slippage. The holding time is too short.
 
the question is ...When are you putting on the trade ???

You are looking for a run up in volatility, correct ??? Why not put them on a few weeks prior to the earning report.

The pop in vol is there(the tradable move). it just doesn't coinside with the report.
 
You must log in or register to reply here.
Back
Top