How hard will I get crushed by this volatility crush?

sle said:
Someone said something like “it’s high, but it’s meaningless” - I was just saying that if there is a chance of it getting to the strike, what you realize along the way will be pretty high. When you are forced to refit that normal distribution so the fourth moment is expressed via second one, you can get some extreme values :)
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You mean @truetype : "Exactly. Tiny options near expiry usually trade at "high" vol because only morons are willing to sell them."

I think you're both saying a similar thing. In high vol stocks, there's not much interest in selling tinies, since out of self-preservation you really shouldn't. The chance that it gets to that point is still there and stocks like Netflix will now and then do exactly that. And also... holding the tiny vs a more juicy shorts makes more sense since your risk is way better...

Anyway... that straddle deflated pretty heavily... guess the shorts got a good pay from that :)
 
JackRab said:
And also... holding the tiny vs a more juicy shorts makes more sense since your risk is way better...
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  • And thats what the OP did.
  • He was long the 220 calls -10% OTM.
  • My guess he bought 1 contract at about $1.50
  • They climbed to about $1.85 before earnings.
  • The risk:reward ratio was very good.



EDIT: The OP's question actually had nothing to do with his trade. The trade was purely directional and had nothing to do with "volatility crush".
 
OptionsOptionsOptions said:
The risk:reward ratio was very good.
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May I ask why you say that? The options were not implying a 10% move and the options expire Friday. The expectancy of these being ITM or worth near $1.50 seems low to me. I'd say over time, buying OTM calls before earnings provides little reward and risks the entire premium. That is close to a 100% loss of your investment.
 
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OptionsOptionsOptions said:
  • And thats what the OP did.
  • He was long the 220 calls -10% OTM.
  • My guess he bought 1 contract at about $1.50
  • They climbed to about $1.85 before earnings.
  • The risk:reward ratio was very good.


EDIT: The OP's question actually had nothing to do with his trade. The trade was purely directional and had nothing to do with "volatility crush".
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o_O

That's not what the OP did... the trade was indeed directional and his question had all to do about the vol crush. If you do a trade on earnings.. you always need to consider the vol crush.

I think risk-reward for that call was shit... this was the call to short from the beginning, since the straddle was about 15 to 17 bucks pre-earnings. So the market expected a move of about 8%. Even if it was 10%, OP wouldn't have made any money... because of the vol crush.

The only reason to hold this call, IMO, would be because you're short ATM and want to be covered.
 
Robert Morse said:
May I ask why you say that? The options were not implying a 20% move and the options expire Friday. The expectancy of these being ITM or worth near $1.50 seems low to me. I'd say over time, buying OTM calls before earnings provides little reward and risks the entire premium. That is close to a 100% loss of your investment.
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:thumbsup: hit the nail Robert.
 
JackRab said:
o_O
That's not what the OP did... the trade was indeed directional and his question had all to do about the vol crush. If you do a trade on earnings.. you always need to consider the vol crush.
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The only thing to consider is the break even point after earnings - in his case $221.50.

JackRab said:
o_O
I think risk-reward for that call was shit... this was the call to short from the beginning, since the straddle was about 15 to 17 bucks pre-earnings. So the market expected a move of about 8%. Even if it was 10%, OP wouldn't have made any money... because of the vol crush.
.
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  • 10% gain would have put NFLX at $222.95
  • The 220 calls would be $3.00+


EDIT: Lets revisit this topic next week with AMZN or GOOGL - I think AMZN will be a good OTM option play for earnings.

Bull market and the race to the first trillion dollar company.
 
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OptionsOptionsOptions said:
The only thing to consider is the break even point after earnings - in his case $221.50.
.
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He was literally asking what that call would be worth if the stock opened at 220 after earnings incl vol crush...

It's got 3 days left, so no... the break even isn't the only thing to consider.

If the 200 straddle is worth about 16, then the market roughly expects a move that big... so 184 or 216... both would mean a pretty shitty scenario for OP, since at 216 and IV of 32 that 220 call would worth be about 1.20... eroding pretty quickly, since theta is 30 cents at that level.

So again... you need to know the likely scenario... and hitting 220 wasn't as likely as you think, since everybody else in the market thought it wouldn't go past 216....

Options are about probabilities....
 
JackRab said:
Okay, lets play... so what OTM would you consider buying?
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RE: AMZN current price $1010.
  • High was $1050 - during regular trading hours.
  • But I'm keeping my eye on $1080 - that was reached last earnings after hours but it did not hold the next day.
  • Oct27 1080 Calls are $4.70.
  • My target price for AMZN next Friday (the day after earnings) is $1100+.
  • Enter into trade next week.
 
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