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No volatility crunch?
- Thread starter countdrak
- Start date
Quote from countdrak:
I am newbie at this but wanted someone to help me understand a trade.
I bought a Yahoo straddle in the morning when the earnings were going to be announced in the evening. I know bad move! I have read a lot about how volatility increases in anticipation of earnings and right after the earnings the volatility goes back to normal. Also I have read how it makes sense to sell the options before the earnings to not get hit by volatility crunch.
Here is my trade -
YHoo - Call - Strike 27.00 - July Expiration - 0.71c
Yhoo - Put -strike 27.00 - July Expiration - 0.51c
Now the interesting thing was that when the results were announced and the stock moved 10% the next day my call (which I sold!) was worth $2.69, naturally the put went to 0.
The call still is worth more than I paid for today and expiration is tomorrow!
What happened here? No volatility crunch? Did I somehow end up with a cheaply valued call? I am not complaining, I made money. Just want to understand how the fluke worked so I can try the same strategy next time.
Thanks/
I'll explain it for you. Here is what your synthetic position was. You were long 100 shares of stock at 26.88 on the close. You were long "two" puts. One actual and one synthetic. The actual put was .51 and the syn put you were long was .63. The stock is now 29.83. So you made 3 pts on 100 shares and lost 51 plus 63 on the puts or 114. Your net was about 190 right? That is exactly what was suppose to happen.
Quote from countdrak:
I am newbie at this but wanted someone to help me understand a trade.
I bought a Yahoo straddle in the morning when the earnings were going to be announced in the evening. I know bad move! I have read a lot about how volatility increases in anticipation of earnings and right after the earnings the volatility goes back to normal. Also I have read how it makes sense to sell the options before the earnings to not get hit by volatility crunch.
Here is my trade -
YHoo - Call - Strike 27.00 - July Expiration - 0.71c
Yhoo - Put -strike 27.00 - July Expiration - 0.51c
Now the interesting thing was that when the results were announced and the stock moved 10% the next day my call (which I sold!) was worth $2.69, naturally the put went to 0.
The call still is worth more than I paid for today and expiration is tomorrow!
What happened here? No volatility crunch? Did I somehow end up with a cheaply valued call? I am not complaining, I made money. Just want to understand how the fluke worked so I can try the same strategy next time.
Thanks/
Take this as a sign that you need to read alot more about options.. the implied vola number going into earnings designates the speculation built into the market of the impending jump.. yes vols implode, but price jumps respectively.. alot of times volatiltiy is priced right going into earnings.. and the stock jumps just as much as was built into the options..
yes vols go up into earnings.. but that doesn't mean the actual nominal amount goes up of the options.. time decays, and vols hold the premium up to a certain extent.. vols can go up into earnings and you can easily still lose money selling before the jump.. there are more factors acting on options then just volatility.. you should read a few books in their entirety before trading them.. losing money without any idea of why it happen is a tough way to learn take it from me .
Quote from Maverick74:
I'll explain it for you. Here is what your synthetic position was. You were long 100 shares of stock at 26.88 on the close. You were long "two" puts. One actual and one synthetic. The actual put was .51 and the syn put you were long was .63. The stock is now 29.83. So you made 3 pts on 100 shares and lost 51 plus 63 on the puts or 114. Your net was about 190 right? That is exactly what was suppose to happen.
this is the 100% best explanation you are going to get for your pnl.