How hard will I get crushed by this volatility crush?

[iprome]

Here's a fairly simple way to guesstimate an answer. Go to IVolatility (free sign up) and look at the one year implied volatility graph for NFLX. You can see the three previous quarterly IV expansion into earnings and their subsequent collapses after the release. Note the IV that they contracted to.

http://www.ivolatility.com/options.j?ticker=NFLX:NASDAQ&R=1&period=12&chart=2&vct=

Take that IV number and imput it into a pricing model (see below) and you will get your answer. Obviously, you are guessing what the post EA IV will be based on the past 3 EA's. You might consider using the range of the three previous quarterly collapses to determine an expected range for this EA.

http://www.ivolatility.com/calc/?ticker=SPX

A very loose way to corroborate this IV number is to look at what the current IV is for the far distant expirations since their premiums tend to be much more minimally affected by IV expansion (the nearest expiration after the EA is where the big bang for the buck occurs).

I've traded a lot of volatility plays on EAs. Some drop like a rock to where they're going to end up. In many cases, the IV drops in the AM but hasn't reached it's nadir, continuing to fade off toward early afternoon. The point? If your long position is profitable in the AM, unless you're riding a price momentum surge in your favor, consider exiting before further IV contraction takes away more long premium.

Thanks for sharing this. But I have two questions on using the volatility chart provided by IVolatility to guide earnings play:

1. Shouldn't you compare pre-earning IV with post-earning HV, as opposed to the IV contraction alone? Here is how I look at it: if, historically, the pre-earning IV has been consistently overstating the post-earning HV, then a short-volatility entry (with or without directional bias) are more likely to be profitable. How do you like it?

2. Their HV curve seems 30-day backward HV, so it may be more suitable for guiding the play with 30-DTE options. If weekly options, say 4-DTE ones, are used, whether (or to what extend) this HV curve is useful?

 

[sle]

It’s a tricky question - my and Rob were just discussing it and agreed to disagree. If the option was closer to the money, the expected decline in vol would be very dramatic, on the order of 50 vol (to give you a sense, my model gives Friday ATM vol as a buy at 37 and a sell at 44 or higher).

However, with this option being right at the cusp of reasonable delta, different people assign different value to the wings (for example, my model accounts for all sort of silly stuff and tells me to buy at 54 vol and sell at 77 or higher). I guess we will see tomorrow morning - my intuition is that it’s a sell at almost any vol considering the muted response but “model is model”.

 

[OptionsOptionsOptions]

Or you could simply trade up and towards earnings but close before the actual event. Why gamble?

• No free lunch. Stocks also trend down before earnings.
• A stock like NFLX easily moves 10%+ after earnings.
• The OP could take the 30% or hang on for a NFLX 10%+ jump after earnings.
• To get a 500% option trade you can't close the 30% gain too early. That's option trading.

============================

1. Keep your eye on AMZN - Earnings October 26.
2. Buy Oct27 OTM calls before earnings.
   
3. DO NOT CLOSE BEFORE ACTUAL EVENT- as you suggest.
   
4. Close on October 27, day after earnings.

 

[tommcginnis]

Hey, I've only scanned this playbook, but if I (*rarely*) have a owned short-timer, and want to lock in/insure production out of it, I'll sell something sweet at a distance that gives me some fair premium in the pocket -- a'la, turning my owned single into a vertical.

With such short time (days??), it may not be worth it, but it's a thought, and y'all sound like you're in a hurry.

 

[OptionsOptionsOptions]

Hey, I've only scanned this playbook, but if I (*rarely*) have a owned short-timer, and want to lock in/insure production out of it, I'll sell something sweet at a distance that gives me some fair premium in the pocket -- a'la, turning my owned single into a vertical.

With such short time (days??), it may not be worth it, but it's a thought, and y'all sound like you're in a hurry.

• Could you translate that into option talk?
• I doubt anybody will understand your jiberish.

 

[tommcginnis]

• I doubt anybody will understand your jiberish.

Damn! I missed the emoji that signifies, "Jeepers! Another douchey newby troll who lacks spelling skill, but thinks they can make that up with profile graphics and idiotic advice! I thought we were running short of such things!"

Anybody see that emoji?? Dang. Ahhh well.

 

[JackRab]

You do realize that you are holding a 90 vol option with 4 days to go? if the Vega does not get you, than the Theta will.

PS. My model gives a 12 vol decline for tomorrow morning

Really? Only 12? I would think that ATM IV would drop to about 40, maybe lower? So spot @220 would mean 220 call at around 3.40...

Fwd vol between Oct and Nov is 32-ish....

EDIT... righto, I didn't get to your 2nd post yet.... I guess we're on similar footings. Any move that stops short of 217 and OP will possibly find it hard to get rid of that call at a value higher than the close...

 

[Robert Morse]

I doubt anybody will understand your jiberish.

New members typically wait until their 10th post before they get nasty. I understood his comment.

 

[spindr0]

Thanks for sharing this. But I have two questions on using the volatility chart provided by IVolatility to guide earnings play:

As I mentioned to the OP, the usage of the volatility curve and then the pricing model is to arrive at a guesstimate. No matter how you approach this, what the final IV level will be is unknown and past performance is no guarantee of future results (looking back at what happening after the last 3 quarterly EA's).

I don't think that comparing the pre-earning IV with the post-earning HV is that relevant since they are independent events (using previous EAs as well as pre versus post IV levels). For example, if you calculate that pre-earning IV has been consistently overstating the post-earning HV by 5%, it's an assumption to believe that this time will be the same. If you find that doing it that way achieves better results for how you approach earnings then you've found something worthwhile.

If I'm selling earnings volatility, I'm buying a later and cheaper expiration IV. It's the disparity between the two that interests me and if the earlier weekly option contracts less than I guesstimated then it's likely that the subsequent weekly used will do so as well, thereby offsetting a piece of the guess error. And if it contracts more, that's to my advantage. When I model these, I vary the post EA IV guess to see how much error the position can withstand. And it doesn't end there because not many EAs cooperate ideally so there's the adjustment management in the AM as well.

As mushinseeker said: "I would start by looking at historicals of the crush post earnings announcement. You can create a whole science out of this trading method. I am sure someone, somewhere is doing this bec this is road less traveled..why? a lot of work!". Yep, you have to start somewhere and I stated how I go about it. It is definitely a lot of work since you have to obtain the EA dates (and keep checking for date changes), the implied volatility for each stock, and then you have to look at the options of one stock at a time and model/chart the numbers. I've gotten away from it because the amount of work isn't worth the reward. If I had the software to filter all EAs and do the heavy lifting, maybe it would be another story.

And as Rober Morse said: "You will still have to have a process to make that guess." It is indeed exactly that. It's a educated GUESS. There's no precision here. If you have a better way of determining that guess, props to you!

 

[Robert Morse]

And as Rober Morse said: "You will still have to have a process to make that guess." It is indeed exactly that. It's a educated GUESS. There's no precision here. If you have a better way of determining that guess, props to you!

I would say I excelled at this back in the day. The hard part was guessing at the move. NOT what I was good at!