How hard will I get crushed by this volatility crush?

[JackRab]

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.

Why not the 1050 for 10.-.. you buy half the number of options for the same $-value... if it does reach 1100 you get x5 while with your 1080 call you only make x4.
Also, that straddle is only 50 buck, so expectancy is 50 dollar move so at least according to that expectancy you break even on 1sd move upwards. With the 1080 call you lose all at a 1sd move....

 

[TrustyJules]

Why not the 1050 for 10.-.. you buy half the number of options for the same $-value... if it does reach 1100 you get x5 while with your 1080 call you only make x4.
Also, that straddle is only 50 buck, so expectancy is 50 dollar move so at least according to that expectancy you break even on 1sd move upwards. With the 1080 call you lose all at a 1sd move....

If I were that bullish on Amazon I would do a ratio trade:

- buy 1 C OCT27 1050 for $ 9.50
- sell 3 C OCT27 1100 for $7.50 (3x2.50$)

Net cost $2 - you are net profitable all the way up to $1116

Up to $1100 your return is better than either the C 27OCT 1050 or C 27OCT1080 due to lower cash outlay. If you got it wrong and Amzn <$1050 you lose only 2$ compared to $10 or $5. Only in case Amzn moves more than 110$ are you losing money. The last couple of times Amzn actually dropped on earnings every time except April 2017 where it was stablish. July 2016 same thing... So personally I dont think this is the right trade - Amazon invests so heavily that earnings inevitably disappoint. It has big moves on announcements of doing one thing or another. Just my 0.02$

 

[OptionsOptionsOptions]

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.

• AMZN at $997.00
• Oct27 1080 calls at $3.35
• My outlook as not changed - AMZN $1100+ next Friday.
• No open position.

 

[JackRab]

If I were that bullish on Amazon I would do a ratio trade:

- buy 1 C OCT27 1050 for $ 9.50
- sell 3 C OCT27 1100 for $7.50 (3x2.50$)

Net cost $2 - you are net profitable all the way up to $1116

Up to $1100 your return is better than either the C 27OCT 1050 or C 27OCT1080 due to lower cash outlay. If you got it wrong and Amzn <$1050 you lose only 2$ compared to $10 or $5. Only in case Amzn moves more than 110$ are you losing money. The last couple of times Amzn actually dropped on earnings every time except April 2017 where it was stablish. July 2016 same thing... So personally I dont think this is the right trade - Amazon invests so heavily that earnings inevitably disappoint. It has big moves on announcements of doing one thing or another. Just my 0.02$

I think you will start to worry a lot when it hits 1110-ish though... not really a comfortable position at that point since risk blows out pretty fast beyond 1100.

Maybe a 1030-60-90 ladder for about 4-4.50... That would be quite comfortable. Good untill 1115, doesn't blow out as much as a 1:3. And the shorts are just outside the straddle value. Less max value, but will reach it sooner...

I guess it all depends on where you thing it will go. I'd rather take the options probability as a decent cue to the projected move than just hope for a 10% rise. And all these suggestions are still bullish anyway, so I guess you still only have a 50% chance of it getting interesting in those situations.

 

[tfp]

thinkorswim .. check their ondemand

thinkorswim - best options analytics platform in the industry...

 

[ironchef]

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.

Or, if he exited when he had a 30% profit instead of waited for expiry. One can still make $ playing the interactions between underlying price, IV and Theta. You just have to be nimble and lucky.

 

[TrustyJules]

I think you will start to worry a lot when it hits 1110-ish though... not really a comfortable position at that point since risk blows out pretty fast beyond 1100.

Maybe a 1030-60-90 ladder for about 4-4.50... That would be quite comfortable. Good untill 1115, doesn't blow out as much as a 1:3. And the shorts are just outside the straddle value. Less max value, but will reach it sooner...

I guess it all depends on where you thing it will go. I'd rather take the options probability as a decent cue to the projected move than just hope for a 10% rise. And all these suggestions are still bullish anyway, so I guess you still only have a 50% chance of it getting interesting in those situations.

I dont disagree - just made a point that if I were as bullish as the OP that's what I would do. Personally I think Amazn will be stable or drop on earnings because of their investment programme which devours cash. Bezos is well known for saying he doesnt believe in profits so earnings are the least of his worries.

Having said that - at 1115 before you need to worry that's not much difference from mine. 5$ over 1110 is merely a 0.5% difference - if we talk about a potential 10% jump of Amazon we shouldnt quibble over a half a percent more or less. You are right that your approach is less punishing if that does happen but it also yields less.

 

[TrustyJules]

Well it seems I have to eat my words as regards Amazon always disappointing as regards to profit. However my proposed trade worked best. Based on the option prices just now:

C OCT27 1080 - purchased according OptionsOptionsOptions for $3.35 now $ 5.50 - up $ 1.15

My ratio trade (long 1050 short 3x1100) purchased for $2 now $ ca. 25.50 - up $23.50

Of course you might argue that my strategy required 20K margin and therefore the return is percentually lower. Risk and Reward always go hand in hand. My point would simply be that as a strategy the outcome was safer because it had a broader range of profitability in the most likely outcomes. A jump of >10% really seemed unlikely to me whereas an outcome between 1000-1100 if you were bullish seemed reasonable as it proved to be.