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

damon_achey · Apr 28, 2006

Quote from gangof4:

short 45 puts
short 55 calls

^ Max risk = 45-price paid on the downside and
infinite-price paid on the upside

long 35 puts
long 65 calls

^ max risk = Price paid

with that in mind, any recommendations as to software that does a reasonable job projecting the post earnings IV drop and, based on that, plotting the projected next day position P&L on a graph? or even software that lets me plug in different next day IV's to plot the projected contract prices at the various IV's i input?

if there's a trading/brokerage platform that has this capability (ie tradestation or IB), all the better.

ThinkOrSwim will do all this, but you have to supply the theoretical "after" IV's

Damon

gangof4 · Apr 28, 2006

Quote from damon_achey:

^ Max risk = 45-price paid on the downside and
infinite-price paid on the upside

^ max risk = Price paid

Damon

what i'm looking for is a calculation that factors in all 4 positions for break even and max loss (max gain too, i guess).

thinkorswim's commish are so high i've never really looked @ them. $2.95 per or $1o + 1.50 per is brutal.

jj90 · Apr 28, 2006

If you sell premium, sell it hedged. Take it up a notch and ratio wings to the long side to prevent statistical outliers.

segv · Apr 29, 2006

Quote from jj90:

If you sell premium, sell it hedged. Take it up a notch and ratio wings to the long side to prevent statistical outliers.

Wise words. Do as I say, not as I do.

-segv

momoneythansens · Apr 29, 2006

Completely agree, wouldn't dream of running a long dispersion strategy under current climates! Not nearly enough juice to short on the indices for a start.

Not comfortable with short/reverse dispersion either so I'm waiting for the right set-up.

Thanks IV.

Quote from IV_Trader:

be careful , MO . The January dispersion would of be a huge loser when Index ( I do DIA) and almost every component went the same direction. Three out of four legs ( except of short put on the index) were a losers. In the matter of fact , reverse dispersion is the way to go lately ( two months out of three)

gangof4 · May 1, 2006

kind of an epilogue...

i spent the entire weekend reading- it's embarrassing how little i knew/know! not that a weekend of reading cured my options trading newbitus- but i have taken one step above being completely option clueless. what's funny is that my 'idea' above turns out to have unknowingly been an iron butterfly.

my relatively good fortune in long calls, straddles and strangles in the past had my view of options skewed, well, the same way everyone's is @ first, i suppose. all i ever saw was leverage and home run potential of long-only strategies with 'limited' risk. funny how that limited risk starts to add up when you have 5 strangles in a row not budge and drop 60% overnight when the IV falls out of bed. i think the options levels of most brokerage firms is assbackwards. they should be changed so that level 1 is butterfly's and the like, and that you couldn't enter 'level 3' long-only positions until you are more experienced- sure would help save a lot of newbs who blow up swinging for the fences.

i assume the first step in the options-as-a-lottery-ticket 12 step program is when you look @ a stock coming into earnings and also see the premium one can collect thru a conservative iron butterfly instead of only seeing the home run potential of the long straddle/strangle trade. hell, i even feel like i'm making more sense in analyzing the long only ideas- like looking @ AAPL coming up towards major resist and looking @, and actually being cognizant of, the recent IV drop- confirming somewhat that, if i'm inclined to put on a long strangle or straddle, this is a pretty good time to enter.

thanks to everyone who responded...

IV_Trader · May 5, 2006

Quote from momoneythansens:

Completely agree, wouldn't dream of running a long dispersion strategy under current climates! Not nearly enough juice to short on the indices for a start.

Not comfortable with short/reverse dispersion either so I'm waiting for the right set-up.

Thanks IV.

Mo , if you still here...another horrible month for long dispersion ; today's move eat almost all premium received on Index and still 2 week to go !
Glad I took short/reverse again !

momoneythansens · May 5, 2006

Good job on the reverse. I can't see a long dispersion environment coming up any time soon...

Quote from IV_Trader:

Mo , if you still here...another horrible month for long dispersion ; today's move eat almost all premium received on Index and still 2 week to go !
Glad I took short/reverse again !

trader56 · Jul 8, 2006

Ok, I'm admitting my total ignorance here.

I came across this thread, and am looking for an explaination of "IV Dump."

My uninformed guess is that it is the sudden collapse of implied volatility.

Is this based on a sudden decrease in the volatiity of the underlying?
This would drop the value of the options - especially ATM and ITM, right?

Would love to hear back from those more knowledgable, and thanks!

MTE · Jul 8, 2006

Quote from trader56:

Ok, I'm admitting my total ignorance here.

I came across this thread, and am looking for an explaination of "IV Dump."

My uninformed guess is that it is the sudden collapse of implied volatility.

Is this based on a sudden decrease in the volatiity of the underlying?
This would drop the value of the options - especially ATM and ITM, right?

Would love to hear back from those more knowledgable, and thanks!

After the news are announced there's no more uncertainty and the IV drops significantly, which hits the options, all of them ATM, ITM and OTM.