i have one question for the options theoreticians here at et about the value of options.

rtw said:
now, i found this very interesting compilation of the potentially most lucrative stocks to bet on through earnings, ¿is there any rule of thumb to determine if any options are priced too cheaply and thus would make for great bets through earnings? ¿how could i tell how big of a movement through earnings has been priced on the options of the stocks in this list?

Bespoke's Most Volatile Stocks On Earnings: April 2018 Edition
https://seekingalpha.com/article/4161974-bespokes-volatile-stocks-earnings-april-2018-edition?page=2


saupload_mostvolall.png



thanks again, regards.
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Not really. Again like I said, everything from earnings is all based on "surprises", unexpected announcements. And there is no price that is too cheap or too expensive before the earnings. I have seen stocks that climbed 10% already before the earnings and continued to climb another 10% after the earnings came out because the earnings was just so good. And I have seen the stock already declined below its previous support before the earnings and only find itself decline even more after the earnings.

The only thing that you can do is trade on options on stocks that are known to be volatile, that have LARGE movements typically after earnings. You can actually find stocks' reactionary moves magnitude in response to past earnings on various sites. But even that is NOT guaranteed. Just because a stock typically moves 15% in response to earnings in the past doesn't mean it would necessarily move that much after THIS earning. And this is where you can get cleaned out. Anytime when the market expects a big move and priced in the big move by inflating the option price beforehand and the stock didn't deliver the big move expected, you would be screwed.
 
rtw said:
good day to everyone. i have been placing my first trades on options over the last three weeks trying to speculate on the current earnings season. i have run into one recurrent situation that i wasn't expecting and i want to understand if there is any rule about the pricing of options...
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1) Option price for stays very close to what you paid for them during the day that you bought them if price and implied volatility do not change much. Longer term options decay very little overnight (theta). Short term options decay much faster.

2) As for "out of the money options will go almost to zero but even in the money options will open the following sessions with no other value other than intrinsic value", you'll have to post some examples if you want the masses to dissect what's going on.

Implied volatility expands prior to an earnings announcement, fattening up option premiums and contracts after the release, causing premium to decrease. In effect, as an option buyer, you're swimming upstream with a built in loss, regardless of what the stock does. You have to get some movement in the underlying just to break even and even more to make a profit. Unless you have some special stock prediction skills for EAs, find a better way to trade EAs.
 
rtw said:
one thing i have learned very convincingly is that if it is so damn hard to profit from very simple directional bets even when one got the direction right, straddles would have been complete losers in all the trades i have made. maybe vertical spreads could be slightly better than just calls and puts, i will have to evaluate that possibility before this earnings season is over.
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Consider exploring ways to sell inflated EA premium and hedging it with cheaper later week/month options.
 
spindr0 said:
Consider exploring ways to sell inflated EA premium and hedging it with cheaper later week/month options.
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Wow you hedge with options that far into the future? Do they provide a good hedge? How much loss do they hedge away on average? Would you be willing to share?

Thanks
 
JSOP said:
Wow you hedge with options that far into the future? Do they provide a good hedge?
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I mentioned monthly only because if the stock doesn't offer weekly, that's your only choice. For earnings announcements, I'd hedge the current week with the following week, hoping that not only do you collect the IV contraction but there's some 2nd week salvage value as well?

How much loss do they hedge away on average? A protective leg in a vertical, iron condor, etc. hedges everything outside that strike less the premium received.
 
spindr0 said:
Consider exploring ways to sell inflated EA premium and hedging it with cheaper later week/month options.
More...


well, actually, i think that selling inflated premium on the most volatile stocks before earning announcements would be a strategy that would generate too much risk and would not work.

in contrast, i think that the most attractive proposition would be to have a list of the stocks that typically move the least in response to earnings announcements (massive, stale, old, boring companies with no prospects for growth) and to sell premium precisely on those stocks. the income generated would be proportionally much lower, but the risk would be practically zero in this rigged world of stupid financial bubbles serially inflated by stupid central banks. thus, the expected returns would be several times higher, more reliable and this strategy could actually be put into practice.


and for speculating into earnings announcements by buying options, i was ble to locate a video i had seen previously on youtube and it is the sinkorswim platform that does provide a rough estimation of the expected usd movement that is priced into the value of options before earnings announcements. that was the tool i was thinking of to help determine whether options are apparently - relatively overpriced or underpriced before earnings announcements.
 
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