Pwned. Fortunately I don't trade such dreadful strategies any more.
Is selling options before earning Good Strategy?
- Thread starter Cam123
- Start date
Huh? My one off story was an example of when this strategy can be risky not when it's successful....point was to show OP that it looks like a good strat but it has some hard to manage risk that he may not have considered if he was looking only at recent earnings moved which have been meek (LinkedIn being the exception recently)
Its gambling.
Selling or buying options before earnings is not a profitable game unless you have some way of predicting the earnings move. In my example the company actually pre-announced but for some reason the options markets never repriced.
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Interesting Question: I did try this in a big way for two quarters in a row in 2015. The logic seems to be solid in that right before earnings the current options have a huge volatility price increase so I reasoned that if you sell an iron condor at the expected stock price move you can take advantage of the "vol crush" the morning after earnings. If the stock price does not change much you can clean up.
I did not try to cherry pick and took all earnings trades that had enough option liquidity to trade, so in the heat of earnings season I was selling iron condors on about 15 to 20 companies a day. Over the earnings season I made about 230 trades.
Even though most of the trades were indeed profitable there were just too many "earnings surprises" that created a "Max Loss" situation on one leg of the iron condor. End result is that I lost in a big way overall trying to do this.
Logic seems to say that the market makers have the options so overpriced that it could be profitable but my actual experience did not work out profitably.
I did not try to cherry pick and took all earnings trades that had enough option liquidity to trade, so in the heat of earnings season I was selling iron condors on about 15 to 20 companies a day. Over the earnings season I made about 230 trades.
Even though most of the trades were indeed profitable there were just too many "earnings surprises" that created a "Max Loss" situation on one leg of the iron condor. End result is that I lost in a big way overall trying to do this.
Logic seems to say that the market makers have the options so overpriced that it could be profitable but my actual experience did not work out profitably.
Thanks for sharing your real life experience. It was tempting but most experts here at ET advised small retail traders like me not to fool around trading during earning and your example is proof.
Goldman Sachs still saying you should buy straddles into earnings.
https://www.fnlondon.com/articles/g...stimating-earnings-season-volatility-20171012
https://www.fnlondon.com/articles/g...stimating-earnings-season-volatility-20171012
As a trade without other considerations its definitely a crap shoot. Your point that stock XYZ only every moved 2.4% is meaningless as you should really translate that into SD and relate the price of the straddle to the statistical average chance of it exceeding the priced in number of SDs. The market is by and large priced correctly but usually this is something in the order of 80% so in 1 in 5 cases you catch an outlier and that outlier has 4-5 times the loss of the maximum gain you have on your 4 other trades. It makes it all a wash.
If you are directional with your straddle its a different issue. You may be of the opinion - for example - that a stock not only has a history of not moving much but that this quarter you dont expect anything extraordinary. The market remembers outliers for a long time so personally I am interested in selling EBAY straddles at this time because I think their returns for the moment are likely to be 'meh'.
The other thing that you can do is to anticipate the volatility balloon ahead of earnings by buying a straddle 2 weeks to ten days before earnings. The theta loss can be compensated - sometimes even exceeded - by the swelling volatility ahead of earnings so that even if the stock stays put ahead of earnings you can come out with little loss. If it does make a big move you are quids in and make a nice profit. Unlike gambling on the outcome of the post earnings SD move this effect is generalised and always occurs so its a more reliable strategy.
Finally a ratio-trade can be more efficient into earnings than a straddle.
If you are directional with your straddle its a different issue. You may be of the opinion - for example - that a stock not only has a history of not moving much but that this quarter you dont expect anything extraordinary. The market remembers outliers for a long time so personally I am interested in selling EBAY straddles at this time because I think their returns for the moment are likely to be 'meh'.
The other thing that you can do is to anticipate the volatility balloon ahead of earnings by buying a straddle 2 weeks to ten days before earnings. The theta loss can be compensated - sometimes even exceeded - by the swelling volatility ahead of earnings so that even if the stock stays put ahead of earnings you can come out with little loss. If it does make a big move you are quids in and make a nice profit. Unlike gambling on the outcome of the post earnings SD move this effect is generalised and always occurs so its a more reliable strategy.
Finally a ratio-trade can be more efficient into earnings than a straddle.