Is selling options before earning Good Strategy?
- Thread starter Cam123
- Start date
It's an interesting question, does the market price the earnings move as a multiple of the ambient volatility or does it price it as an outright move. My experience is that it's the latter, since the earnings move is idiosyncratic to the stock, while the ambient volatility is largely explained by the broad sector/market volatility.
Yes, in addition to making money from my own trading. Didn't you admit that your motivation is the same ("matter of absolute returns")?
The ability of our members to make money is directly related to their effort and willingness to learn. We share many strategies and trade ideas. Yes, we have members who expect to make triple digit returns with no effort - those usually quit after few weeks. But we also have many members who are with us for 4-5 years. I can assure you they would not stay if they didn't make money.
Not at all. As I mentioned before, if my performance is not good, my clients cancel. In fact, my clients probably have much shorter fuse than yours. Plus most fund managers get paid management fee, which means they make money regardless of performance. Might not be true in your case, but it is in most cases.
I never claimed that I have a holy grail. And I never claimed the strategy has no capacity constraints. And no, I'm not giving away my alpha. We are not claiming to have some secret black box recipe. All strategies we use are well known and widely used. The question is how you use them and how you manage your risk. This is what we teach our members.
We are not a get-rich-quick-without-efforts scheme. We believe in hard work and steady gains.
Not necessarily. Same strategy doesn't mean same trade. There are many variations (different strikes, different expirations etc.) In addition, there are a lot of unofficial trades, so members who cannot get filled on one of the official trades can always try of the other trades.
Sle's post above explains it more clearly than I did. 252 is the number of trading days in a year, used to annualize var. 4 is the number of trading days at base or ambient var used as a multiplier, the 1 on the other term (the one day at 0.10**2 var) is implied. The 5 is a divisor to bring the five day var back to one day var. ** in python means exponentiation so the 2 means vol raised to the second power which converts vol to var. The sqrt around the whole equation brings var back to vol.
I usually like to work with var because it is linear in time so I can usually do the math approximately in my head. The final sqare root involves larger (annualized) numbers so I can do that in my head too using the small portions of the natural log table I have memorized.
The ability to do this type of calc in your head can be useful. For example suppose the one week out contract is trading at 20% IV and the two week out contract is trading at 22% IV. What is the IV of just the second week? Easy to do using var, not as easy using vol.
See post by sle for a better explanation. Option price change is due to delta, curvature, and theta (decrease in optionality and rate/divyeild decay), not "change" in IV.
BTW, though I have never been dumb enough to subscribe to an options signal service, the experience of friends who have has been uniformly negative.
Personally I prefer to think in terms of straddle prices and not IV.
I know that IV will increase as we get close to earnings. This is a fact and not questionable. The big question is: will the IV increase be enough to outpace the negative theta?
This is why the IV itself doesn't really matter. What matters is the straddle price. We call it RV (Relative Value). Is RV now low or high compared to previous cycles? How does RV hold?
For example. for some stocks RV might hold the best (or even increase) between T-10 and T-3. So we know that the best time to enter is at T-10, assuming the price is still reasonable. We just set limit orders to enter and patiently wait.
Once filled, we set limit orders to sell, based on reasonable profit targets.
I know that IV will increase as we get close to earnings. This is a fact and not questionable. The big question is: will the IV increase be enough to outpace the negative theta?
This is why the IV itself doesn't really matter. What matters is the straddle price. We call it RV (Relative Value). Is RV now low or high compared to previous cycles? How does RV hold?
For example. for some stocks RV might hold the best (or even increase) between T-10 and T-3. So we know that the best time to enter is at T-10, assuming the price is still reasonable. We just set limit orders to enter and patiently wait.
Once filled, we set limit orders to sell, based on reasonable profit targets.
Be a little bit careful on that. The equation I posted assumes that the one-day event vol distribution is unimodal (of the same lognormal form as the base or ambient vol). Unimodal distributions are mathematically tractable enough so that a unimodal event spike distribution is easy to incorporate into your typical binomial pricing model. Unfortunately market implied risk neutral event vol distributions (especially for large events like an FDA decision for a biotech name) are often bimodal. Bimodal distros are difficult to put into a binomial pricing model as the tree no longer recombines.
You could view the implied risk neutral event distro pretty easily even in Excel, and trade if you think the implied probability density is way off.
As for Steady options "making money," I think a quote from Larry Hirabedian is appropriate:
"The fastest way to a good track record is to make one up."
Really? Then please explain this:
This straddle was entered the same day at 9:40am at 2.43, and 2 hours later IV increased by 12-15% and the straddle was up 20%+.
Don't believe me? Here are the screenshots:
(exited when profit target was hit)
Maybe they subscribed to the wrong service?
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Like anything driven by supply and demand, implied volatility does go up and down. Obviously, if you have a position in options, you will make or lose money due to these moves. It could be reprice of the event or simply a bid for ambient volatility. However, there is nothing systemic about it - if I had to guess you would find that mean risk-adjusted change in implied volatility prior to the events is zero.
Of course it's supply and demand. What's your point? The trick is to take advantage of the price when IV goes down and buy low to reduce the risk. I provided you with a live example of a straddle going up in price in matter of hours. There are dozens similar examples.
I don't know what you call systemic. I know that our winning ratio with straddles is over 75% - that is systematic. I know you don't believe those numbers are real - that's fine. I will let skeptics be skeptical and we will continue making money.
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