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

JSOP said:
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.
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Well, I guess it depends on your definition of win BIG, REALLY REALLY BIG. In order to compensate for 70-80% loss risk, I think the win has to be at least 200%, would you agree?

In order for this to happen, the stock has to move 3 times the implied move. I scanned some of the most popular stocks, and I had a hard time to find any that moved that much. I can post screenshots for any stock you wish that shows the straddle returns. And even if there is a chance for this to happen, most of the time you might need to wait few years. Meanwhile, since your risk is 70-80%, you can allocate only small allocation of your account to those trades, otherwise after few big losers your account is toast. Personally I would not allocate more than 2-3% of my account. So even if and when this BIG, REALLY REALLY BIG winner comes, your account grows by less than 10%. Not exactly "your whole income for the rest of your life".

But yes, hope is what makes people to make those stupid bets time after time. Hope and ignorance. And if you are not careful with position sizing, your account will be gone very quickly.
 
Kim Klaiman said:
Well, I guess it depends on your definition of win BIG, REALLY REALLY BIG. In order to compensate for 70-80% loss risk, I think the win has to be at least 200%, would you agree?

In order for this to happen, the stock has to move 3 times the implied move. I scanned some of the most popular stocks, and I had a hard time to find any that moved that much. I can post screenshots for any stock you wish that shows the straddle returns. And even if there is a chance for this to happen, most of the time you might need to wait few years. Meanwhile, since your risk is 70-80%, you can allocate only small allocation of your account to those trades, otherwise after few big losers your account is toast. Personally I would not allocate more than 2-3% of my account. So even if and when this BIG, REALLY REALLY BIG winner comes, your account grows by less than 10%. Not exactly "your whole income for the rest of your life".

But yes, hope is what makes people to make those stupid bets time after time. Hope and ignorance. And if you are not careful with position sizing, your account will be gone very quickly.
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That was the mistake that I made with a straddle trade that I did on one of the most volatile stock for earning play. I allocated 80% of my capital to that trade thinking its average historical move is about 10-15% after earnings pretty much every single time so the chance of me losing is very small. But luck would have it, just when I played it, that stock went FLAT, I mean airport runway flat that has never happened before after earnings because it issued both earnings beat AND lowered guidance so I guess the market sold and bought at the same time and ended up cancelling each other's effects. So I ended up losing 80% of my portfolio.

Lesson REALLY learned. LOL Now I really caution people when they want to do straddle/strangle trades on earnings.
 
Kim Klaiman said:
Well, I guess it depends on your definition of win BIG, REALLY REALLY BIG. In order to compensate for 70-80% loss risk, I think the win has to be at least 200%, would you agree?

In order for this to happen, the stock has to move 3 times the implied move. I scanned some of the most popular stocks, and I had a hard time to find any that moved that much. I can post screenshots for any stock you wish that shows the straddle returns. And even if there is a chance for this to happen, most of the time you might need to wait few years. Meanwhile, since your risk is 70-80%, you can allocate only small allocation of your account to those trades, otherwise after few big losers your account is toast. Personally I would not allocate more than 2-3% of my account. So even if and when this BIG, REALLY REALLY BIG winner comes, your account grows by less than 10%. Not exactly "your whole income for the rest of your life".

But yes, hope is what makes people to make those stupid bets time after time. Hope and ignorance. And if you are not careful with position sizing, your account will be gone very quickly.
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This is probably a really dumb question lol.... but if they lose 80% of the time.. then why not just sell the straddles for an 80% win rate?
 
vanzandt said:
This is probably a really dumb question lol.... but if they lose 80% of the time.. then why not just sell the straddles for an 80% win rate?
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Over time, this is probably a better strategy than buy the straddle. But in the short term, you can still experience some big losses if the stock moves big time. It can happen since earnings are so unpredictable. Please naked straddle requires huge margin, so it is a very inefficient use of capital.
 
vanzandt said:
This is probably a really dumb question lol.... but if they lose 80% of the time.. then why not just sell the straddles for an 80% win rate?
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You don't really need to. Just write both calls and puts on stocks that you REALLY think don't move much after earnings but if the stock breaks out to ONE of the 2 sides then you are in BIG trouble. Anything unexpected is going to drive the IV thus option price through the roof!
 
Looks to me like there is alpha in trading long/short straddles across earnings. With some statistical work you can put on positive EV trades. MZOR was quoting a 9% implied move. The thing has never moved more than 8% in the last 20 quarters. I am Not saying it can't move 15% it's all about the plus EV.
 
Kim Klaiman said:
Over time, this is probably a better strategy than buy the straddle. But in the short term, you can still experience some big losses if the stock moves big time. It can happen since earnings are so unpredictable. Please naked straddle requires huge margin, so it is a very inefficient use of capital.
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I believe you are right, especially with TSLA.

Selling TSLA straddle (at $300) before the last earnings announcement would have netted the seller huge profits in 3 days, probably better than a correct directional bet. The inflation of premiums didn't seem to be symmetrical -- the put side was more inflated than the call side.
 
TSLA is actually one of the stocks that provides pretty consistent gains for options sellers. But it doesn't mean that from time to time it cannot lose big time when the stock moves more than expected, and this is the big risk. If you are willing to take an occasional big loss and structure your position accordingly, then TSLA is probably one of the better candidates to sell options before earnings. I would still not do it naked. You can use iron condor or calendar to limit the risk.
 
vanzandt said:
This is probably a really dumb question lol.... but if they lose 80% of the time.. then why not just sell the straddles for an 80% win rate?
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If you lose 80% of the time then you need to win 4 times as much as you lose (per win) in order to break even. Are ya feeling lucky big guy? :D

Conversely, with a short straddle, you can lose more than 4x.

The short answer? There are no free lunches for just showing up and placing a bet. :)
 
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