Newb Q on Selling strangles into earnings to profit from IV dump

[riskarb]

I think you both need to get tested with all this talk of herps and HIV.

 

[IV_Trader]

Quote from Pabst:

I wonder how many folks saw the huge OI on both puts and calls at the May 27.5 strike and thought the stock would be "pegged" at that level through expiration. Of course three weeks from now, who knows.......

I like to meet the vols seller and ask him WHY this trade looked soooo good to him yesterday. straddle was at 90c (on the bid) , that's represents only 3% from the stock's price with 3 1/2 weeks to go . BWT , MSFT did moved 5% just last qtr , I guess some have a short memory .

 

[momoneythansens]

Is it just me or do Maverick's posts often end up describing some kind of sexual activity?

Quote from riskarb:

I think you both need to get tested with all this talk of herps and HIV.

 

[RichardRimes]

Quote from momoneythansens:

Is it just me or do Maverick's posts often end up describing some kind of sexual activity?

:eek:

 

[segv]

Quote from Maverick74:


The irony is, by spreading out and doing a lot of these, you are actually increasing the probability of blowing out.

...

So no matter what you do, as long as you sell naked straddles, you are exposing yourself to catastrophe. It does not matter the duration in which you hold the short straddle. And it does not matter if you do 1,000 of them, sooner or later, your Katrina will come, the hurricane, not the attractive girl. LOL.

...

There are a million ways to make money trading that do not carry the disaster tag with it.

Mav,

I tend to be a net buyer of premium, but I am curious as to what extent you believe the "sigma event" risk is or is not diversifiable? If the average occurrence of a "portfolio destroying" event was 1 in every 100 years, would you be willing to take that risk? How about 1 in 100,000 years? From your argument, I would guess that you are also a net buyer of premium/gamma. However, there is also "sigma event risk" for a net long portfolio. Is this risk acceptable to you because the maximum value at risk is a known quantity? Very generally, what is your preferred position if it is not zero, and how do you get there (without disclosing the secret sauce)?

-segv

 

[riskarb]

No Seg... Mav is long and short gamma, simultaneously. He's solved the Unified Field Theory and has a cure for AIDS and Herps. Now, if he can just get the techs at the office to plug in that Cat-5 cable!

Mav knows I am j/k.

 

[Nasdaq5048]

Quote from gangof4:

Looking for opinions on whether the current post earnings IV dump is unusual, and whether my analysis is flawed.

I've done ok with buying mostly strangles into earnings. lately though, the dump seems much more pronounced- across the board. seems the iv before is higher than usual and the next day dump more severe. i'm seeing so many positions where you get a good % move in the underlying and end up down 80% on one end and ALSO down 25% on the other.

Look @ something like ISRG tonight: if the move holds, it's up $15/15% after hours and it may STILL be profitable (or a minimal loss) if you wrote the May 105 straddle for $16.50. geesh.

In my watch universe, and even looking @ the big % movers list, writing a straddle or strangle is batting like .900- many times taking gains on both the calls and puts.

sure, with the risk of a rocket, the strategy isn't bulletproof, but it sure seems to me that, as long as you're spreading the risk around, the gains from the overnight IV dump on the majority of positions will more than offset the occasional gap up/down.

am i missing something, or is this a damn good strategy over the long term?

thanks.

That's what long term capital thought before they blew up. Their simulation told them they can't lose more than a couple of hundred million in a day in 2 zillion light years and yet they lose billions in weeks. Is murphy's law, the market is there to fool most of the people in the least amount of time regardless of who you are. If you think you can't be hit by lightling while your business is to stand in the middle of a football field during rainy days, all i can say is to wish you good luck you might never get hit. There are people who survive without being hit, but not the majority of them.

 

[segv]

Quote from Nasdaq5048:

There are people who survive without being hit, but not the majority of them.

Probability is a funny thing. If you walk across a street on a regular basis, probability says that getting hit by a car is inevitable. Indeed, for every day that you live, the daily probability of death approaches 100%. These people out there eating, crossing streets, driving cars, drinking booze, sleeping, having sex, and shorting premium are all crazy I tell you. I am staying in the panic room!

-segv

 

[knocks420]

Quote from segv:

Probability is a funny thing. If you walk across a street on a regular basis, probability says that getting hit by a car is inevitable. Indeed, for every day that you live, the daily probability of death approaches 100%. These people out there eating, crossing streets, driving cars, drinking booze, sleeping, having sex, and shorting premium are all crazy I tell you. I am staying in the panic room!

-segv

"this is your life, and its ending one minute at a time."

I papertraded a short IV play on NTRI right before earnings:

IV = 70%, sold the combo for 7.70
NTRI gapped $17
Had to buy the combo back for 18.55
Loss of 10.85 which eliminated all previous gains and then some.

 

[Maverick74]

Quote from riskarb:

No Seg... Mav is long and short gamma, simultaneously. He's solved the Unified Field Theory and has a cure for AIDS and Herps. Now, if he can just get the techs at the office to plug in that Cat-5 cable!

Mav knows I am j/k.

It's called Schmamma (being long and short gamma at the same time). Obviously you havn't read Cottle's latest book where he dedicated 5 chapters to the trading of schmamma.