I am new

[rallymode]

Quote from JSHINV:

If implied volatility exceeded statistical volality and you expected it to come down closer to implied volatility, this may be a good time to sell.

This is a very common misconception among new option traders. Here, lets use a simple straddle example.

You have some kind of a report be it earnings, preannouncement, court decision, etc. Now the options get bid up in anticipation of that report and the implieds go through the roof. The hist vols are sitting at 20 while the implieds are at 100. What do you do? Do you sell it? Do you buy it?

My answer is i dont know. I dont look at options as being cheap vs expensive. If you told me how much the stock would move after the news hits, i will tell you which one. In this case they could've been cheap OR expensive, but always after the fact is when you will actually know

No serious option trader will do naked straddles pre-event with any serious size. Do this same trade 100 times randomly and you will be a net loser and a big one at that as you will have a few very large draws.

I am not trying to be harsh but merely making a point that to be a winner a naked straddle must not move too much, atleast not so much as to have your delta loss overwhelm any volty gains. The reverse is true if you bought the straddle.

So what do you do then? Well if this is your choice of play then selling the body in the front month and buying the wings in the back months is a very common way to play it. Again, there is alot of material already on ET on these as well. Should make for a very busy weekend for you.

 

[momoneythansens]

Quote from JSHINV:

I said I sold, today, I meant bought to close of course.

FYI, if you click on the edit/delete link at the bottom right of each post you can correct any mistakes you made if within 30 minutes of the original post.

NTRI had an earnings release last night. Short straddles on earnings is not a strategy for longevity IMO. The straddle will be priced accordingly and it is not possible to tell whether the straddle owner or seller will be the winner until after the fact.

One needs to be careful when scanning for high implied/statistical volatility candidates. There oft be a reason. The notion of buying cheap or selling expensive as mentioned by Rallymode is a little less straightforward than first meets the eye.[EDIT: I see he has added more on the subject above!]

There are more conservative ways to capitalize on the implied volatility crush post-earnings if that was your intention. Short calendars are the simplest to understand and implement. NTRI was not a good candidate for a short calendar however.

Good luck. You'll get there...

MoMoney.

 

[Eliot Hosewater]

Quote from rallymode:

This is a very common misconception among new option traders. Here, lets use a simple straddle example.

You have some kind of a report be it earnings, preannouncement, court decision, etc. Now the options get bid up in anticipation of that report and the implieds go through the roof. The hist vols are sitting at 20 while the implieds are at 100. What do you do? Do you sell it? Do you buy it?

My answer is i dont know. I dont look at options as being cheap vs expensive. If you told me how much the stock would move after the news hits, i will tell you which one. In this case they could've been cheap OR expensive, but always after the fact is when you will actually know

No serious option trader will do naked straddles pre-event with any serious size. Do this same trade 100 times randomly and you will be a net loser and a big one at that as you will have a few very large draws.

I am not trying to be harsh but merely making a point that to be a winner a naked straddle must not move too much, atleast not so much as to have your delta loss overwhelm any volty gains. The reverse is true if you bought the straddle.

So what do you do then? Well if this is your choice of play then selling the body in the front month and buying the wings in the back months is a very common way to play it. Again, there is alot of material already on ET on these as well. Should make for a very busy weekend for you.

A good example is GOOG last week - earnings right before OE. High IV leading up to the event, then it just did nothing. Would have been a great time to sell a straddle. IIRC, the 390/390 lost almost $30 on Friday. I think you had to go out 60 points in either direction to have a losing
short straddle.

But who knew?

 

[JSHINV]

Quote from Eliot Hosewater:

Do you use PowerOptions to find your picks? Just wondering because I've seen KCI and NTRI listed there with fat premiums.

Optionvue5.

Expensive. But worth it.

I didn't go after fat preimums. By fat premimums without looking at IV at compared to SV, I was saying this is a bad sell strategy. I went to stocks at the time where the IV exceeded the SV by a substantial amount. I didn't expect IV to go much higher.

 

[minmike]

The problem with thinking that implied volatility will revert to statistical volatility should have become apparent to you in that trade with the law suit goign on. statistical volatility doesn't in clude things like new lawsuits, earning, etc. With events like that, the options with price them in long before the stats will.

Options are more or less insurance/ assumptions of risk. if you are not using them to play direction and paying someone else to assume some of the risk, Why do you think that you will be better able to price options than someone on the floor who makes two or three stocks option there life?

 

[JSHINV]

Quote from rallymode:

This is a very common misconception among new option traders. Here, lets use a simple straddle example.

You have some kind of a report be it earnings, preannouncement, court decision, etc. Now the options get bid up in anticipation of that report and the implieds go through the roof. The hist vols are sitting at 20 while the implieds are at 100. What do you do? Do you sell it? Do you buy it?

My answer is i dont know. I dont look at options as being cheap vs expensive. If you told me how much the stock would move after the news hits, i will tell you which one. In this case they could've been cheap OR expensive, but always after the fact is when you will actually know

No serious option trader will do naked straddles pre-event with any serious size. Do this same trade 100 times randomly and you will be a net loser and a big one at that as you will have a few very large draws.

I am not trying to be harsh but merely making a point that to be a winner a naked straddle must not move too much, atleast not so much as to have your delta loss overwhelm any volty gains. The reverse is true if you bought the straddle.

So what do you do then? Well if this is your choice of play then selling the body in the front month and buying the wings in the back months is a very common way to play it. Again, there is alot of material already on ET on these as well. Should make for a very busy weekend for you.

Thanks. This is the kind of comments I am looking for. But, I will take what you say, research, evaluate it and get back to you. But, it won't be before the weekend, maybe after. I am traveling and when I am at home I get a comment or two about sitting in front of my computer screen

Don't worry about being harsh - you are not. I want to know what you think. If I don't respond right away its only because I am busy. Let me have it. Keep those cards and letters coming.

Keep in mind, I don't bet on the naked straddle as a stand alone trade - never. As soon as a the PPS hits a certain bencmark I cover it with the underlying shares. If it goes down to the low benchmark, I go short with the corresponding shares. If it hits the upper benchmark, I go long with the corresponding shares. I will trade back and forth as necessary. But, this benchmark is above the the breakeven - a fair amount above. I always and I mean always have the cash to cover an uncovered position. Now if you think this type of strategy is ridiculous, by all means please let me know and why. More weekend work!! I am always prepared to put up the cash.

Thanks for the post. Let me have it as far as what you think!!!

John

 

[JSHINV]

Quote from JSHINV:

Anyone please, feel free to comment.

Feel free to say I am a moron. That doesn't bother me. As long as you give me reasons as to why. My thought as a short straddle can easily end up as a covered call with an out of the money short put or a covered put with an out of the money short call. Or it can change a few times to different between the three before expiration as I trade in and out of positions. Of course I can lose some by trading because of the gap. But, if I have the cash and I trade correctly, placing orders ahead of time, I don't think there is a high chance of financial ruin. Honestly, I have the cash. I transfered over $100,000 in my brokerage account to cover last week on the KCI straddle play. I am not going to go out that far for a at least for a while. I realize that what I am describing is doing a synthetic, this, that and the other. I don't need the defintion of what I am doing. I want to know if you think my overall strategy is stupid and why. I quoted part of my post below, because I think some of you read short straddle and got out your machine gun.


Thanks. This is the kind of comments I am looking for. But, I will take what you say, research, evaluate it and get back to you. But, it won't be before the weekend, maybe after. I am traveling and when I am at home I get a comment or two about sitting in front of my computer screen

Don't worry about being harsh - you are not. I want to know what you think. If I don't respond right away its only because I am busy. Let me have it. Keep those cards and letters coming.

Keep in mind, I don't bet on the naked straddle as a stand alone trade - never. As soon as a the PPS hits a certain bencmark I cover it with the underlying shares. If it goes down to the low benchmark, I go short with the corresponding shares. If it hits the upper benchmark, I go long with the corresponding shares. I will trade back and forth as necessary. But, this benchmark is above the the breakeven - a fair amount above. I always and I mean always have the cash to cover an uncovered position. Now if you think this type of strategy is ridiculous, by all means please let me know and why. More weekend work!! I am always prepared to put up the cash.

Thanks for the post. Let me have it as far as what you think!!!

John

 

[JSHINV]

Quote from minmike:

The problem with thinking that implied volatility will revert to statistical volatility should have become apparent to you in that trade with the law suit goign on. statistical volatility doesn't in clude things like new lawsuits, earning, etc. With events like that, the options with price them in long before the stats will.

Options are more or less insurance/ assumptions of risk. if you are not using them to play direction and paying someone else to assume some of the risk, Why do you think that you will be better able to price options than someone on the floor who makes two or three stocks option there life?

Models, deltas, gamma's et. al. don't mean a thing when one when everything is contingent on the outcome of a trial. I know that. That is why I said in a previous post, I will think twice about ever putting myself in this position again.

 

[momoneythansens]

Quote from JSHINV:
Anyone please, feel free to comment.

I quoted part of my post below, because I think some of you read short straddle and got out your machine gun.

John,

I think most people realized you were hedging your short straddle with the underlying on adverse moves. Despite your request not to know the definition of what you are doing, I'll tell you it is called negative gamma scalping. If you research gamma scalping long straddles and then reverse the process for short straddles, you wil see what I mean.

There is nothing wrong with doing this.

The point that I and others were making was pertaining to short straddles prior to events, whether that event is a court case or earnings. KCI was an example that you felt you should avoid repeating. However NTRI had an earnings event and thus by selling the straddle on this issue you effectively repeated the same mistake.

To quote your earlier comments: "But, I will avoid a trade that ONE KNOWN event in the short term future wil have such a significant impact on the PPS in either direction."

There was a known event. If you looked at past NTRI moves after earnings I'm sure you would see that some were significant. You came out ahead in this instance and sure enough you may well come out ahead if you do this many times but as I stated earlier, this is not a strategy for longevity IMO.

There is a reason why implied volatilities get pumped up above statistical approaching these events. It is key to understand why. The high implied volatility is telling you that there is an expected large move impending. It would be nice to scan for these large differentials and simply sell in order to capture the reversion to statistical. Alas, it is precisely the large differentials that you need to be wary of. There is always a reason.

Again, I would stress that the notions of buying cheap and selling expensive are not as straightforward to implement as first meets the eye.

Persevere.

MoMoney.

 

[JSHINV]

Momoney,

Makes perfect sense. You compose very well, even a beginner like me can understand your posts.

Keep those cards and letters comming.

Thanks!!

Quote from momoneythansens:

John,

I think most people realized you were hedging your short straddle with the underlying on adverse moves. Despite your request not to know the definition of what you are doing, I'll tell you it is called negative gamma scalping. If you research gamma scalping long straddles and then reverse the process for short straddles, you wil see what I mean.

There is nothing wrong with doing this.

The point that I and others were making was pertaining to short straddles prior to events, whether that event is a court case or earnings. KCI was an example that you felt you should avoid repeating. However NTRI had an earnings event and thus by selling the straddle on this issue you effectively repeated the same mistake.

To quote your earlier comments: "But, I will avoid a trade that ONE KNOWN event in the short term future wil have such a significant impact on the PPS in either direction."

There was a known event. If you looked at past NTRI moves after earnings I'm sure you would see that some were significant. You came out ahead in this instance and sure enough you may well come out ahead if you do this many times but as I stated earlier, this is not a strategy for longevity IMO.

There is a reason why implied volatilities get pumped up above statistical approaching these events. It is key to understand why. The high implied volatility is telling you that there is an expected large move impending. It would be nice to scan for these large differentials and simply sell in order to capture the reversion to statistical. Alas, it is precisely the large differentials that you need to be wary of. There is always a reason.

Again, I would stress that the notions of buying cheap and selling expensive are not as straightforward to implement as first meets the eye.

Persevere.

MoMoney.