How to capitalize on post-earnings IV crash?

[Rodney King]

Quote from spindr0:

Based on the expectation of a possible move, IV tends to expand pre earnings and collapses post EA.

Of course it does, because stocks move more on earnings days than random days. The question is whether the post-earnings decline in IV is too much or too little.

 

[spindr0]

Quote from Rodney King:

Of course it does, because stocks move more on earnings days than random days. The question is whether the post-earnings decline in IV is too much or too little.

I really don't know your point is. First you ask if the OP thinks MM are dumb and misprice options and now it's a question of how much IV declines.

There are multiple questions in an EA IV play - the strategy, IV change as well as UL price movement... and sometimes, time. Lots of moving pieces, all of which have nothing to do with mispricing.

 

[Rodney King]

Quote from spindr0:

I really don't know your point is. First you ask if the OP thinks MM are dumb and misprice options and now it's a question of how much IV declines. There are multiple questions in an EA IV play - the strategy, IV change as well as UL price movement... and sometimes, time. Lots of moving pieces, all of which have nothing to do with mispricing.

I'll try a third time, then give up... Yes, IVs tend to decline after market-moving news such as earnings. But is there any edge to selling options prior to earnings? Options are expensive pre-earnings for a reason -- because the stock is unusually likely to move on earnings day. The question is whether they're <i>too</i> expensive. For all OP knows, they could be <i>under</i>priced on average.

 

[ramaTrade]

Quote from rosy2:

you have to have a large enough position to make any vol change meaningful. short a one lot straddle when vol comes in probably doesn't even cover retail commissions

That is not true:

1. Options commission are dirty cheap now. They shouldn't be a reason to prevent you from executing a options trade if you think there is a profit a make.

2. More often than not, the IV drop alone will show you a nice profit, sometime can even compensate the loss from the underlying move. As a matter of fact, if underlying does not move more than 5% either way, a straddle/strangle will very likely show a profit.

 

[ramaTrade]

Quote from Rodney King:

I'll try a third time, then give up... Yes, IVs tend to decline after market-moving news such as earnings. But is there any edge to selling options prior to earnings? Options are expensive pre-earnings for a reason -- because the stock is unusually likely to move on earnings day. The question is whether they're <i>too</i> expensive. For all OP knows, they could be <i>under</i>priced on average.

stock is unusually likely to move on ANY day

 

[rew]

Quote from spindr0:

Even one naked straddle can make you good money when your commission per contract is under a dollar and there's a post earnings IV collapse.

If IV was high that was because there was an expectation of a large move up or down after earnings. If that in fact happens, your short straddle can still lose money despite the collapse in IV.

It is not easy at all to make money on earnings. You have to be smarter than the MM.

 

[Rodney King]

Quote from ramaTrade:

2. More often than not, the IV drop alone will show you a nice profit

"More often than not.. a profit" is true of premium selling in any form.

 

[spindr0]

Quote from Rodney King:

I'll try a third time, then give up... Yes, IVs tend to decline after market-moving news such as earnings. But is there any edge to selling options prior to earnings? Options are expensive pre-earnings for a reason -- because the stock is unusually likely to move on earnings day. The question is whether they're <i>too</i> expensive. For all OP knows, they could be <i>under</i>priced on average.

At times there is an edge, namely when near month IV expands far more than the next month and it's a volatility play on both coming down, more so the former. It's an attempt to capture the disparate rates of contraction.

 

[spindr0]

Quote from rew:

If IV was high that was because there was an expectation of a large move up or down after earnings. If that in fact happens, your short straddle can still lose money despite the collapse in IV.

It is not easy at all to make money on earnings. You have to be smarter than the MM. [/B]

Of course a naked straddle can lose even if IV contracts... perhaps even a lot of money if the underlying makes a large move post EA. Because you can lose money doesn't negate the fact that you can make money from IV contraction.

My simple reply to the poster who stated that "you have to have a large enough position to make any vol change meaningful" was that you could profit on 1 short straddle from volatility coming in. I wasn't advocating naked straddles or analyzing risk or any other metric - just stating the obvious that a profit is possible

 

[Cache Landing]

You can't capitalize on the post earnings IV crash successfully over the long term. There aren't really any options strats that I haven't analyzed to death under those conditions.

There is absolutely ZERO edge in any of them. It is pure speculation. All of them have a slight negative expectancy long term.

My advice is to not waste your time trying to trade earnings. That is not where the money is. That is just where the gamblers hang out for the adrenaline.

Is your objective to gamble, or are you trying to make money?