Quote from falconview:
My sympathies Jeff.
Was reading up on trading earnings reports. A lot of studies. One tidbit I picked up someplace, was there are a small bunch of people doing what Ryan is doing and making positively indecent amounts of money. ( depends on your viewpoint of course)
My straddles with the wide bid ask spread are predictably losing today so far. Never more, pick stocks with more than 1 to 3 cents between the bid and ask is a new rule now. ( grin ) Wish I could find a report that told me which stocks have 10% swings on earnings reports. Not yet!
falcon,
Here is a good mathematical point about a stock with a 10% swing on earning:
$50.00 stock times 10% = $5.00
Range = $45 to $55
On something like this you need a straddle with cheap options:
$50.00 stock
50 strike call = 1.00
50 stike put = 1.00
Debit...............-2.00
You need to at least get a double on these trades.
Stock needs to move to $46 or $54, but $45 or $55 is better because of bid to ask spread and sometimes variable pricing at sale (it doesn't always sell at a black/scholes textbook price).
So with that set up above your profitable between $46 to $54.
If the straddle debit (call/put total per contract) costs you $4.00
your screwed! No real profit. Need cheap options.
If you use a strangle:
Stock Price $50.00
52.5 Call Price....$ 1.00
47.5 Put Price.....$ 1.00
Debit..................$ 2.00
Strangle above at a 10% stock move ($45 to $55):
At a stock drop to $45 the 47.5% put is worth $2.50 (plus any potential premium = time value left, but time premium value disappears as an option gets deeper in the money).
At a stock rise to $55 the $52.5 call is worth $2.50 (plus any potential premium = time value left, but time premium value disappears as an option gets deeper in the money).
Any way you look at it, if you have a strangle (even with cheap $1.00 options) and the stock only moves 10% in one direction after earnings your net with only be slightly more than breakeven at best.
Back in 1990's my wife and I traded these trying every combination of straddle, strangle, more time, less time, high I.V. options, Low I.V. options.
The thing that generated the most consistent performance was
1: Find a stock that historically has high implied volatility, but right now the I.V. is closer to its historically low.
This creates cheap options but has the possibility of an I.V. rise to historical norm (high) from some catalyst (like earnings) that hasn't occurred yet.
Go to ivolatility.com, become a free member, log in, and then type any stock or index in the quote box (top left of home page).
It will give you "current" implied volatility, historical I.V, 52 week low I.V and 52 week high I.V.
You want your trade pick closer to the 52 week low I.V. then the 52 week high I.V.
Very useful free tool.
