Is selling options before earning Good Strategy?

[Kim Klaiman]

I had a colleague at Morgan Stanley who did his PhD at the Moscow State University. He told me an amusing story, very apropos in my opinion.

It's a prestigious school and it's very hard to get into. In Russia, as one can imagine, this leads to various forms of corruption and hustling. At some point, there was a guy that was supposedly able to pass bribes to the university admission committee. He'd usually refuse to help, but sometimes he'd go for it. It was rumored that if he is getting involved, the kid was guaranteed to get in.

Eventually, somehow the story unraveled. Predictably, he was not able to influence the admission process in any way. However, he was involved with some secretary at the university that saw the lists of admitted students some time before the admissions were officially announced. So if he got involved, the kid was definitely guaranteed to be admitted.

Fascinating story, not sure how it is related.

 

[Kim Klaiman]

You know with all strategies or investment ideas I always follow one rule that I learned from Peter Lynch's book One up on Wallstreet, way back in the 80ies. If you dont understand it - dont invest in it. For Lynch this meant he avoided tech stocks not because he thought they were a bad investment, he said he just couldnt fathom how the industry worked and how to value it. On the other hand when Lee Iacocca took over Chrysler he backed up the truck and loaded his Magellan fund with as much as a 10% stake in Chrysler. In the context of the times a rather brave move.

Risk is fine but you have to understand what you are doing. Frankly what Kim proposes doesnt seem that outlandish to me but then it appears we read some of the same books. Hedging the S&P against the VIX on the other hand I can sort of see how that interacts but I just dont get the mechanics hence I would abstain.

This is an advice that I repeat every day to my members.

Posted this on the forum on Friday:

1. PLEASE MAKE SURE YOU UNDERSTAND THE STRATEGIES BEFORE COMMITTING REAL MONEY.
2. PLEASE MAKE SURE TO READ THE RELEVANT TOPICS.
3. PLEASE MAKE SURE TO ASK QUESTIONS IF YOU DON'T UNDERSTAND SOMETHING, AND DO IT BEFORE YOU MAKE THE TRADE, NOT AFTER.

 

[ironchef]

Fascinating story, not sure how it is related.

It is related if you could "see" (predict) the outcome before the outcome and only selected those trades that could make money?

 

[ironchef]

So, to finish up with a bit of harassment



By chance, I had dinner with an old friend who knows a fair bit about the whole trade advisory thing and many other retail-oriented services. He deals with it for a living in an enforcement capacity. We had some wine and I got a complete "download" on the state of that segment of the industry. He showed me some web sites. Some of the stories were truly horrifying. I could barely finish my impossible burger (1)

So I change my mind. On the follow, I think your service is better than average and probably better than most. I don't believe your track record (2), but I'd rather see a new trader sign up with you vs. a guy that recommends shorting an S&P call against a short VIX call (3). Whatever you're preaching, your clients are unlikely to blow up and as the time goes, they might learn a thing or two. There, I said it and it's official.

1. well, not really - the burger thing is truly incredible, I ate two and I am a fan now
2. sorry, it would take more than your word and some screenshots to override my 20 years of experience in finance
3. that's taken verbatim from another advisors web site - his claims of 80% win rate I believe, but

I always respect someone honest and with an open mind.

 

[iprome]

We are looking for stocks that show consistent and steady IV increase before earnings. Then we look at the charts of straddle prices in the last 4-8 cycles and see when would be the best time to enter (the charts are usually not linear). Then we look at the current straddle price and compare it to previous cycle prices. After we set a price target entry, we just set a GTC order. If it triggers - good. if not, we skip the trade.

Thanks for your reply, Kim. The challenging part of this for retail folks like me might be to find out the (intraday) straddle prices in previous cycles. It seems some services like IVolatility sells it, but it is probably not cheap...

 

[Kim Klaiman]

Thanks for your reply, Kim. The challenging part of this for retail folks like me might be to find out the (intraday) straddle prices in previous cycles. It seems some services like IVolatility sells it, but it is probably not cheap...

You can use ONE software, it has prices with 5 minutes intervals.

 

[ETraderJoe]

In my opinion, holding ANY option position (long or short) through earnings is pure gambling. Earnings are too unpredictable. Yes, there are companies that most of the time move more than the implied move - however, all it takes is one cycle where it doesn't move, and the straddle can lose 70-90% easily.

We implement a strategy of buying a straddle few days before earnings and selling just before earnings are released. I described the strategy in How We Trade Straddle Option Strategy article. We have been doing it for the last 6 years with very consistent results.

Kim, with regards to this strategy of yours, could you comment on buying a strangle vs. straddle?

 

[JSOP]

Is selling options before earning Good Strategy?

It's good until when it's not good anymore. Majority of the time it would be good but once or twice in a while you are going to get losses. And most of the time when you are good, you are going to become more envious of the huge profit that you missed out if you had bought the options or invested in the underlying.

 

[Kim Klaiman]

Kim, with regards to this strategy of yours, could you comment on buying a strangle vs. straddle?

Strangle is general would be more aggressive strategy. Higher risk higher reward, especially if you go with strikes far OTM. You would need the stock to move more, but the gains would be higher percentage wise if the stock moves. If it doesn't, the losses could be higher as well.

If the stock is between strikes, you might consider go with a strangle using closest strikes (for example, stock at 252.5 - use 250/255 strangle if there is no 252.5 strike).

 

[TheBigShort]

Kim, with regards to this strategy of yours, could you comment on buying a strangle vs. straddle?

Buying straddles/strangles into earnings is not how you want to look at this. Kim Klaiman does not understand the strategy he is selling. The way you want to look at the option is what is the earnings move priced into this option/what is the earnings moved priced into the options surrounding it? How large/small is this move compared to what it actually moves etc...