IV trading on earnings

D

DarkProtoman

Pfizer is about to release its quarterly earnings. It's IV is at 22%, and should revert back to its mean of 14% after the release, I have a plan t profit no matter which way PFE goes.

Sell the February 14 calls, currently trading at 86.6%, and buy them back on January 31st, once the calls' IV has imploded.

Should I delta-hedge?
 
Quote from DarkProtoman:

Pfizer is about to release its quarterly earnings. It's IV is at 22%, and should revert back to its mean of 14% after the release, I have a plan t profit no matter which way PFE goes.

Sell the February 14 calls, currently trading at 86.6%, and buy them back on January 31st, once the calls' IV has imploded.

Should I delta-hedge?
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If you sell the calls naked, how do you plan to profit if the stock rallies?

But this doesn't makes sense. You are saying the Feb 14 calls are trading at 86.6 vols and you expect it to come down to 14%
 
Quote from newwurldmn:

If you sell the calls naked, how do you plan to profit if the stock rallies?
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Buy April 19 calls using the proceeds from my naked sell. Then if I somehow get assigned on the short ones, I can exercise these to cover.
 
Quote from newwurldmn:

If you sell the calls naked, how do you plan to profit if the stock rallies?

But this doesn't makes sense. You are saying the Feb 14 calls are trading at 86.6 vols and you expect it to come down to 14%
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I never said the call's vol'll come down to 14%. I said the underlying's vol will come down to 14% from 22%. Who knows where the vol of the call is going to, I just know down.
 
You never mentioned anything about the April 19 calls before. But okay. You will sell the Feb 14 calls and buy the April 19 calls. Without having some indication as to how much the vol will come in, you cannot determine how much you will make (if anything).

Google implied vol came in a ton (probably like 70 vols) but you still lost money because the move was greater than that. How do you know something similar won't happen to PFE if you don't have a view as to how much you can make if you are right?
 
There are so many things wrong with this idea...

I have no idea what the underlying's * 14 % * vol has to do with this or even what it is. Are you referring to HV? Whatever, its irrelevant. Option premium contraction is what's relevant to earnings.

My guess is that you looked at an OptionXpress chains and saw an 86.6% IV for the Feb 14 call. The problem with them is that they use the B/A midpoint to calculate the IV (hence the 86% IV). So you're chasing contraction of an imaginary number?

The real problem is that the Feb 14 call is so far ITM that its bid is below parity and selling it locks in a loss from the get go. Period.

If you buy the April 19 calls @ 2.95 for protection and exercise them to cover an assignment on the short 14 calls, you're throwing away that premium as well.

And you said that you have a plan to profit no matter which way PFE goes.? Well, at least you got the earnings date right :)
 
Quote from spindr0:

There are so many things wrong with this idea...

I have no idea what the underlying's * 14 % * vol has to do with this or even what it is. Are you referring to HV? Whatever, its irrelevant. Option premium contraction is what's relevant to earnings.

My guess is that you looked at an OptionXpress chains and saw an 86.6% IV for the Feb 14 call. The problem with them is that they use the B/A midpoint to calculate the IV (hence the 86% IV). So you're chasing contraction of an imaginary number?

The real problem is that the Feb 14 call is so far ITM that its bid is below parity and selling it locks in a loss from the get go. Period.

If you buy the April 19 calls @ 2.95 for protection and exercise them to cover an assignment on the short 14 calls, you're throwing away that premium as well.

And you said that you have a plan to profit no matter which way PFE goes.? Well, at least you got the earnings date right :)
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Yeah. Maybe I should just buy the April 19 calls and KISS.
 
Quote from DarkProtoman:

Yeah. Maybe I should just buy the April 19 calls and KISS.
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How is that inline with your thesis that implied vol will fall and you don't know which direction PFE will go?
 
Quote from newwurldmn:

How is that inline with your thesis that implied vol will fall and you don't know which direction PFE will go?
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Because analysts have researched that PFE will go up, based on its fundamentals.
 
Quote from DarkProtoman:

Because analysts have researched that PFE will go up, based on its fundamentals.
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Okay. So now you think that PFE will go up. Before you were talking about profiting from any direction by selling implied vol. Now you are talking about profiting from a rally by buying implied vol. I think that you are a little confused in your view here. If I were you, I wouldn't trade this right now.
 
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