OCs Implied Volatility Trading Journal

Coach,

I am analyzing the trade on FFIV with small number of contracts. Can you take a look at the graph in the attachment. It has a shape of U. If there is spike in IV, it will raise above zero line.

IV spike may occur 1 or 2 weeks before the ER. When are you planning to sell the jan options ( after dec expiration ?) to capture good premium.

What is your rough estimate of IV spike in April options if IV goes by 10% in Jan.


Please let me know your comments
 
New position on CTSH:



CTSH @ ~$80

BTO 20 APR $80 Calls @ $7.20

STO 10 DEC $80 Calls @ $2.05

STO 6 DEC $80 Puts @ $2.30

BTO 20 APR $80 Puts @ $6.20

This position is pretty flat deltas and high on vega initially. Looking for 5 - 10% absolute value increase in vols over the next month or so which would push the r/r profile above $0 and I can then lock in a profit with an adjustment. If not, the stock has made some nice price swings in the past and I could do well if it continues. recently added to S&P500 so I hope that will not kill volatility lol
 
yes, I used the wider strikes to reduce the initial debit which may reduce the profit potential.

It might move the breakevens a little bit future.


Quote from optioncoach:

I think your long strikes are wider than mine, is that correct?
More...
 
1st delete your post with the pic since it has your personal ToS info :)

2nd, yes this position moves above the zero line with a 5 or 10% absolute increase in vols and that is the vega part of this trade. It also makes nice change if the stock moves up or down by a nice amount. So you get two different benefits with a low risk play. One choice is to trade this only until the short strike expiration which is where the smallest loss will occur. However it is better to keep rolling the strikes and taking in credit where possible waiting for the IV increase and directional move. I will hold all options until the short expiration and then adjust there since I do not want to buy back any shorts with significant time value premiums.
 
Quote from optioncoach:

Looking for 5 - 10% absolute value increase in vols over the next month or so which would push the r/r profile above $0
More...

Phil,

this is not going to happen. Say, you take a ticker that historically experiences a vol ramp up prior to earnings and you notice that vols tend to increase say 1000-2000 bps. Then you draw a cute graph in your TOS/optionvu software and discover that if vols do increase 1000bps, your risk graph goes above zero.

I will let you do the research but let me ask you this. Do you really think you have an arb on your hands, just because vols increase ahead of earnings?
 
It is not an arbitrage, it is a delta neutral very high vega position. If vols increase the entire value of the position increases. I did not say it stays above the zero line, you have to adjust to lock it in or take the position off to realize the profit, I would think that is obvious.

It moves above the zero line at that moment assuming vols and the stock stay constant. They do not, which is why you lock in the profit.

If you are short a straddle and vols drop and the position is profitable is that an arb? No, if you do nothing the position can turn into a loser. This is no different. A R/R graph is a snapshot in time like a balance sheet. If vols increase 1000 to 2000 bp then the whole graph moves above $0 but it is not guaranteed to stay there unless you adjust to lock it in or take the profit off.

If you buy a long $50 straddle for $8.00 with vols at 50% and the stock goes nowhere but the vols jump to 65%, the risk graph can move above the $0 line. I never said it was an arbitrage or locked in profit simply from vols jumping. However with vols increasing the whole graph moves above the $0 line meaning I can close out for a profit even if the stock went nowhere.

This is no different than any other option position.. :confused: I will let you do the research :D

Quote from rallymode:

Phil,

this is not going to happen. Say, you take a ticker that historically experiences a vol ramp up prior to earnings and you notice that vols tend to increase say 1000-2000 bps. Then you draw a cute graph in your TOS/optionvu software and discover that if vols do increase 1000bps, your risk graph goes above zero.

I will let you do the research but let me ask you this. Do you really think you have an arb on your hands, just because vols increase ahead of earnings?
More...
 
Phil,

you are missing my point. The 1000bps increase in vols due to earnings is not necessarily going to swing your "position" to profit, which is the arb comment i made. Almost every stock out there gets a 1000bps uptick in vols prior to earnings. You can lose even if vols increase 1000bps. To earn with these backspreads, you will need either a large move right away, or an increase in vols at the right time.
 
Rally.... all you are doing is stating the obvious lol. Why did I buy long-term months and sell short-term months, because I am investing now when vols are low and waiting for vols to increase over time. I am selling premium in DEC, a month where I expect vols to stay flat, to reduce the cost. I am not selling premium in the months where vols are expected to spike...yet.

Of course I set it up for vols to increase in a certain time frame that is why this is a time spread... The 1000 - 2000 bp increase in vols is expected to occur down the road and my long term options have smaller thetas while I am selling premium as I wait. I make the most money from vol moves AND stock moves. That is a part of the structure of the position as demonstrated in the risk graph which is very straddle like. Straddles also make money from directional swings and vol increases...

if vols increase at expiration of the shorts the whole graph can be above zero depending on your ratios and greeks. Take a closer look at Mantenar's chart to see what date it has.

I think you are reading more in then what is said

Quote from rallymode:

Phil,

you are missing my point. The 1000bps increase in vols due to earnings is not necessarily going to swing your "position" to profit, which is the arb comment i made. Almost every stock out there gets a 1000bps uptick in vols prior to earnings. You can lose even if vols increase 1000bps. To earn with these backspreads, you will need either a large move right away, or an increase in vols at the right time.
More...
 
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