You have to post numbers, so I better see what you're asking.
need advice on this
- Thread starter stockoptionstrader
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You have to post numbers, so I better see what you're asking.
The pre-earnings volatility drives options prices up; the option sellers know the move will be just as wild as the buyers want it to be. If I had a neutral outlook but wanted to profit on volatility I would have done an ATM straddle while also selling options above and below to improve the cost basis at the expense of limiting the profit. I think that's a reverse butterfly? In my head I'd theorize that buying a spread helps minimize the increased premium from volatility because you're both selling an option to offset the price/profit of the other but I'm not sure how this works in reality.
As Jones said, you set up an extremely wide strangle and needed a massive move to make money on the width + premiums paid. As Cyjack said, the premiums you paid to set up this play were jacked up because it was pre-earnings. What wasn't said was that you also set the play with very little time value left in the options so your Puts gained only intrinsic value and almost no extrinsic value. Because of all of these reasons, this was an extremely low probability trade that you should avoid. You literally needed a $13.80 move just to break even.
Uhm... what are the IV's?
I would say, pre earnings IV of 120? Then next morning after earnings as soon as options market opens 40-ish?
Yep, that's the power or IV...
So at 120 IV before earnings, the straddle was about 10 dollars... so that was actually priced pretty correct, since the 8% move was 11.50 dollars? So the straddle would've made you some money....
The earnings play in options with short time to maturity, if you expect a large move, should be long straddle and short strangle..., basically short butterfly... where the wings/strangle is a but beyond the straddle value... because the straddle value kinda is the expected move...
I would say, pre earnings IV of 120? Then next morning after earnings as soon as options market opens 40-ish?
Yep, that's the power or IV...
So at 120 IV before earnings, the straddle was about 10 dollars... so that was actually priced pretty correct, since the 8% move was 11.50 dollars? So the straddle would've made you some money....
The earnings play in options with short time to maturity, if you expect a large move, should be long straddle and short strangle..., basically short butterfly... where the wings/strangle is a but beyond the straddle value... because the straddle value kinda is the expected move...
"straddles don't work".....work for what?
Let me give you an example of using straddles:
Many years ago I worked for a major Pharma company and was responsible for the clinical trial data for new drugs. We used to occasionally have what were called "analyst days" during which the analysts who covered the company would come out to hear a review of where we stood on the compounds we had in the pipeline. The R&D director for each compound would make a presentation and field questions. These events were like major news events with the analysts from major players (e.g. Goldman etc) video taping the entire thing and asking questions trying to get an edge on which to trade. I would sit in the audience mostly just out of curiosity.
At one such event an important compound was presented and major studies were under way which would determine a go/nogo decision that was very important for the company. Someone in the audience got up and asked "when will this data be available?". Since I was the one who knew the answer to that question the presenter looked at me and said "Dan...when will we get that data?" I remember answering "around the first of march". Immediately I heard buzzing all around me and I heard one analyst say quite clearly into his cell phone "buy march straddles".
Now at the moment I made that statement the information was new information. The market was unaware of that information and the people who immediately bought the March straddles probably stood to make a profit. By the next morning the information was common knowledge and the price of the March straddles matched the expectation of the stock move based on that information.
Now it would have been illegal for me to buy March straddles prior to the time I let the cat out of the bag. Actually we were all forbidden to speculate on the stock price at any time lest impropriety be implied.
What's the point? If you don't have inside information straddles are most likely priced correctly for the expected outcome. If you do have inside information it probably is illegal to trade on it. Ask Martha Stewart.
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I like this trade if you expect a move as this is a cheaper way to set it up and also has a higher chance of success. Personally, I don't like buying strangles for earnings because if I know it is going to move THAT much, I typically have a view on direction and little desire to pay for both sides.
If you have a strong view on direction, just use a spread. Lots of ways to set up depending on how aggressive you want to be and how much you want to risk.
That make sense to me.
I have three questions for you sir:
1. So for the most part there should not be any advantage buying or selling straddles as the market already priced in the expected outcome?
2. If so, would that hold true also for general expirations not tie to anticipated events?
2. In your experience or do you know of any studies that examined if the expected outcome be more accurately priced in for short expirations than for longer expirations or are they about equal?
I appreciate your post and TIA.
Depending on your view of efficient market theory, everything is already priced for an expected outcome. All trading is based on the idea that perhaps the value will vary from market expectations. A straddle is certainly worth it if the market prices in for a 5% move yet you predict a 10% move in either direction.
Yes. The people who create the real market are human beings and there is no absolute connection between information and security price. People can be wrong and if you believe that your information and judgment is superior to that of the people who are creating the market it behooves you to put your money where your ego is and make a bet.
What's the probability that you can beat the market? Who is the market? Who is setting the prices?
I post trades here all the time. I make about half to two thirds the trades I post. Obviously I don't believe that the real market is efficient.
My emphasis is to do the research so that my information is equal or superior to that of the people who are setting the prices. Secondly I try to keep my trades in an area where I have expertise such that my judgment MIGHT be a little superior to the market. Thirdly I try to make trades so that even if the market is right, and even if I agree with the market I can make a few dollars over and above prevailing interest rates. Actually if you examine my trading history what I mostly do is try to understand the prevailing market opinion and then sell insurance for that prevailing market opinion. I rarely (but not never ) bet that the market is wrong. (e.g. see my post on HSY).
Were there any checks and balances to ensure you did not profit? Was it based on personal integrity or did they ask you who your had your brokerage firm with and inspect the trades you made with them?