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

The higher the implied volatility, the more premium you take in for a short spread (vertical, iron condor, etc.) and the less risk. Stocks that move the least for EA's have low IV, generate kaka premium and any surprise will hammer you more because the cost of hedging is too great versus that small credit received.

You're kidding yourself if you think that you can determine if options are under priced prior to an EA.
 
spindr0 said:
You're kidding yourself if you think that you can determine if options are under priced prior to an EA.
More...
You don't think it could ever happen that EA would be mis-priced for some reason? I've definitely seen and exploited it myself.
 
rtw said:
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
More...

Rough movement expectation = full value of ATM straddle.


I've read a lot on earnings based options trades. Almost everyone agrees - holding short / long positions over options cannot be reliably won. There are better systems involving buying and selling options before and after earnings.
 
Facts:
  1. Options before earnings are on average overpriced.
  2. Most of the time the stock will move less than the implied move. There are always exceptions, but for 90% of the stock, a straddle purchased a day before the event will be a loser the next day.
  3. Volatility crash after earnings event will cause dramatic decrease in options prices.
  4. For "most volatile stocks", the options prices will reflect the earnings history and be even more expensive.
Now, if you buy options before earning without learning those basic facts, don't be surprised if you lose money. If you hope to learn trading on free online forums with tons of misinformation and ignorance, don't be surprised if you lose money. And yes, most traders will blame corrupted markets, inefficient governments and clueless Fed - while in fact, the only person to blame is themselves for not doing their homework.

Learn First. Trade Later
 
Kim Klaiman said:
Facts:
  1. Options before earnings are on average overpriced.
More...

Well, there is a matter of median expectation and a matter of overall average expectation. There was a Goldman study recently stating that holding straddles across the earnings has a weak positive expectation as a whole.
 
Secret Santa said:
Well, there is a matter of median expectation and a matter of overall average expectation. There was a Goldman study recently stating that holding straddles across the earnings has a weak positive expectation as a whole.
More...
Yea.. same as tastytrade studies.

Even if it was true (which is not), the risk of 70-80% loss is very real and outpaces any potential rewards.
 
Secret Santa said:
(a) No, the GS study says that expectation is positive towards long convexity.
(b) In the end, it's about the proper sizing to avoid the risk of ruin
More...
I don't know what their methodology was, but most major US stocks has a consistent history of overpricing options before earnings.

And yes, position sizing is the key. Which means that for a strategy that can lose 70-80% you can allocate only very small percentage of your portfolio. Which means that your overall gains will be very small even if the strategy was profitable overall.

But my point is that people really need to learn first why those options are so expensive before earnings, and what is volatility crash, before placing the trades. Blaming the corrupted markets is the easiest thing to do. If it's not my fault, why bother to learn?
 
Secret Santa said:
You don't think it could ever happen that EA would be mis-priced for some reason? I've definitely seen and exploited it myself.
More...

Near term options inflate before an earnings announcement but that does not mean that they are mis-priced.

Where this gets interesting to me is when near term inflates far, far more than immediate far term, shifting the risk graph significantly. For example, if the R/R of an IC is normally 1:2 and it shifts to 1:3, it's more attractive. I don't consider that as under priced or mis-priced but merely a higher expectation of a move, priced into near term.
 
Kim Klaiman said:
Facts:
  1. Options before earnings are on average overpriced.
  2. Most of the time the stock will move less than the implied move. There are always exceptions, but for 90% of the stock, a straddle purchased a day before the event will be a loser the next day.
  3. Volatility crash after earnings event will cause dramatic decrease in options prices.
  4. For "most volatile stocks", the options prices will reflect the earnings history and be even more expensive.
Now, if you buy options before earning without learning those basic facts, don't be surprised if you lose money. If you hope to learn trading on free online forums with tons of misinformation and ignorance, don't be surprised if you lose money. And yes, most traders will blame corrupted markets, inefficient governments and clueless Fed - while in fact, the only person to blame is themselves for not doing their homework.

Learn First. Trade Later
More...

Yes but just for that 10% of the time that you win, you win BIG, REALLY REALLY BIG to the point that you can earn your whole income for the rest of your life (if you are capitalized enough) and just retire and never need to trade again like winning the lottery almost except the odds of winning in Straddle/Strangle over earnings is still better than winning the lottery. And I think this is the reason why people are drawn again and again and again to do those trades and of course lose.
 
You must log in or register to reply here.
Back
Top