How market makers price earnings
- Thread starter TheBigShort
- Start date
Hi newwurld, what would be considered a good return by retail level? also I think this strategy could produce great returns if done properly. (Wild swings tho, which is why I think it is a retail game.)
Lets say a stocks earnings move are normally distributed and we also believe that earnings are random.
If the market has a implied move of 5(meaning 68% of all moves will be within +/- 5) and we take a look at the last 50 earnings move and the standard deviation is 10 then we are technically making 5 bucks. If we do this enough times ie. with 2000 earnings (retail can trade a ton of earnings reports) then we should make money in the long run. If you look at TIF the other day, SD for earnings moves is 6.8. The market was implying it should be 4..... if the market was implying 7.5 we would have taken the sale and got our shirts ripped off but it would'nt have been so bad. We could have also sold for 7.5 and bot the +/- 15% wings for 5 pennies each.
Do you say that because the earnings season is limited and assuming you won't use the capital elsewhere the rest of the time? It does seem like you could spread it out enough that if there was a statistical edge you'd see very little drawdown.
are you an economist/statistician by nature/profession? what do you usually use R for?
Also newwurld could you tell a strategy thats does produce good returns without saying the secret sauce ofcourse
No, I only play one on TV. I use R mostly for quick and dirty research projects.
which one???There are two ways to trade earnings (the way I see it):
Statistically or idiosyncratically (if that's a real word)
Statistically will have low returns because you will have to buy/sell many earnings and you will only be looking to earn a few vols over the whole portfolio. But for that 1 month or whatever you will suck up a lot of capital spreading trades over so many underlyings. The law of large numbers, will reduce your variance, but the edge overall is pretty small. You will also need efficient execution - something retail trades don't have.
Idiosyncratically - you will look for specific opportunities and go big on them. I do this. Returns can be good but variance in your pnl is extremely high.
BigShort seemed to be thinking about statistically.
Newwurld you would never hold the position for longer than a day. Lets say on average you did 5 earnings a day and you are trading with a low cost broker (.50 - .70 a contract). FL had pre earnings jump vol of 136%(annualized) I would have sold the straddle because I believe FL should only have jump vol of 100% thats locking in 36% vol (if i am right). There will be HUGE variance with this strategy even if you are only using 3% of capital per trade. But it should return very good results if you have the stomach. You could also do 1% of capital pertrade which would actually give you a nice pnl line. Im working on a simulation right now and will post when I am done. any tips would be wonderful.
Also here is a link to where I am going to get most of my data. They provide what you need for only $20 a month. https://www.optionslam.com/
@Secret Santa does morgan stanley have you chained to the desk? This thread could use some of your math expertise.