Hmmm, can't be wrong if its working. I'd be wrong if it wasn't working, but then that's not the case.
My option trades
- Thread starter ryanpatrick
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Hmmm, can't be wrong if its working. I'd be wrong if it wasn't working, but then that's not the case.Here's an elaboration of my example. First of, my research and notes on AKAM says it averages about 15% pop/drops post earnings. I put AKAM at $34, and with my research showing better odds of going higher, a 15% pop from $34 puts me near $39.
Next up, it's safe to say that IV is always high ahead of events like earnings. I didn't even look at the actual IV numbers for AKAM, but with AKAM's feb 34 call priced at $2.00 and AKAM at $34, anyone can tell its high given 10 days left till expiration. To play it safe, I will give AKAM 100% confidence that it reaches $38 on solid earning report. Here's where I calculate risk vs reward. If I went and just bought the calls at $2.00 with a 100% confidence at $38, then I'm looking at a 100% return or $2.00 back for my $2.00 risk, which comes to a 1:1 risk ratio.
But because IV is high, the value on the feb 38 calls were trading up there at $0.50-$0.55 (AKAM would have to move by 13-14% just to breakeven on these options). Playing it with the 100% confidence that AKAM will reach $38, I can then sell these 38 calls at $0.55 (2 - 0.55 = $1.45) and lower my cost to 1.45. Still with the expectation to get $4.00 back, I now have a potential reward of $2.55 instead of just $2.00. So instead of risking 2 for 2, I'm now risking 1.45 for 2.55, or a risk ratio of 1.75:1 vs just 1:1.
Hope that also explains it to the other guys asking question.
All out AKAM at 3.4 net. Gains came to $750. Turning my attention to WFM, after hours clearly pointed to lower open, but here we go WFM hits new highs right off the open.
I was stuck at $6800-$6900 for a while, didn't think I'd get over this hump soon. Thanks to AKAM, and now SWI QCOM and WFM all showing gains too......DIS was going so well, I'll see if it can muster a push back before expiration. Even dead RVBD came back to life....might as well grab $10 back from RVBD for happy hour.
Quote from ryanpatrick:
Not to belabor it, but you don't "need" high vol, in fact it's contrary. I guess I don't follow the logic behind some of your punts. You go long calls before earnings when all the stocks are in their top decile on 60-day vol. I don't see this as a sustainable method.
Ha! Ha! Loved that from Atticus and the rebuttal from Ryan. We shall see I guess for us ignoramuses. When it comes to technicals, nobody beats Atticus ( smile ). There is no way in hell I would rebutt ATTICUS.
I followed some of what you said Ryan. Not all, but some. I get the $2 premium bit and the say 10% ( round number ) expected move in the underlying upward. For a debit spread. I´m not sure how you figure the move in the option on a 10 % move in the stock. But probably could run it on an option calculator? Just haven´t got the picture in my mind as I´m more used to dealing in indexes which are somewhat slower in movement.
Still trying to figure out your risk reward ratio thingy. If the stock is at 34 and going to move 10% then it would be moving up 3.40?
Guess I should try the option calculator? The $2 spread would move up how much in comparison? You had a reward ratio figured in there somehow?
I followed some of what you said Ryan. Not all, but some. I get the $2 premium bit and the say 10% ( round number ) expected move in the underlying upward. For a debit spread. I´m not sure how you figure the move in the option on a 10 % move in the stock. But probably could run it on an option calculator? Just haven´t got the picture in my mind as I´m more used to dealing in indexes which are somewhat slower in movement.
Still trying to figure out your risk reward ratio thingy. If the stock is at 34 and going to move 10% then it would be moving up 3.40?
Guess I should try the option calculator? The $2 spread would move up how much in comparison? You had a reward ratio figured in there somehow?
But because IV is high, the value on the feb 38 calls were trading up there at $0.50-$0.55 (AKAM would have to move by 13-14% just to breakeven on these options). Playing it with the 100% confidence that AKAM will reach $38, I can then sell these 38 calls at $0.55 (2 - 0.55 = $1.45) and lower my cost to 1.45. Still with the expectation to get $4.00 back, I now have a potential reward of $2.55 instead of just $2.00. So instead of risking 2 for 2, I'm now risking 1.45 for 2.55, or a risk ratio of 1.75:1 vs just 1:1.
Wow! I rather get the glimmer of this, but not totally yet. Thanks for the more in depth explanation. I guess you bought the 34 and sold the 38 ? So you bought in the debit spread at $2 and sold the 38 at .55. Going to have to look this up AKAM to get an idea of where you placed this debit spread. Is it out, or in the money? The idea of selling was to capture the swollen premium from volatility. Depending where it was, wouldn´t that offset also the increased cost of the 34? Anyway roughly speaking I think I vaguely understand where you are coming from. I can see where you would leg out. Selling the long at top volatiligy and highest premium value, and waiting for the short to drop premium as the volatility dies off.
Wow! I rather get the glimmer of this, but not totally yet. Thanks for the more in depth explanation. I guess you bought the 34 and sold the 38 ? So you bought in the debit spread at $2 and sold the 38 at .55. Going to have to look this up AKAM to get an idea of where you placed this debit spread. Is it out, or in the money? The idea of selling was to capture the swollen premium from volatility. Depending where it was, wouldn´t that offset also the increased cost of the 34? Anyway roughly speaking I think I vaguely understand where you are coming from. I can see where you would leg out. Selling the long at top volatiligy and highest premium value, and waiting for the short to drop premium as the volatility dies off.
into trlg 37 calls....that's it for me this week. There is NUAN and LNKD to watch too, but my research just doesn't give me enough confidence at those price levels.
QQQ is still going up. But I got my target profit before the close yesterday. So just to watch it. Wait for the next buy signal for a new trade. Don´t care if I missed something, so long as my trade and profit target worked out, without worrying about what would happen if I had held overnight. I´m only doing one or two trades a week, but I want a high percentage probability of winning. Then I can scale up contracts and increase my risk.
Yeah, its a little tricky, and I just learned this trick no more than 9 months ago.....but they key points is that AKAM was at 34, and at-the-money 34 calls priced at $2.00. My own research shows AKAM has 100% chance of hitting $38 and then the odds drop off dramatically beyond that.
Here's the scenario: buy akam feb 34 call at 2.00, and anticipate selling at 4.00 today with a 100% return or risk $2.00 to get $2.00 reward, hence, 1:1 risk ratio.
2nd scenario: buy akam feb 34 call at 2.00, short feb 38 call at 0.55 and anticipate selling the whole thing back for about 4.00. With this scenario, the cost is actually 1.45, which would make the return 2.55 (4-1.45=2.55). So what I get is the same trade, but I'm only risking $1.45 and anticipate getting 2.55 back. The risk ratio here is 2.45:1.45 or about 1.75:1, which means I'd be getting about $0.75 more for every $1 risk compared to scenario 1.
And both scenario also implies that IV crushes after earnings on akam feb options.