OCs Implied Volatility Trading Journal

Can someone clarify this. Thanks.

I've heard before and this was also mentioned here to buy the front month straddle 1 week before the earnings and to sell it just before the earnings release due to volatility increasing going into earnings.

Surely there must be some risks involved as no strategy is that simple. Am I correct to assume that one may still suffer a loss despite the gain in volatility due to :

1) stock price movement. If price moves too far out from time of purchasing the straddle to before the earnings release, this may negate the profits from volatility increase.
Also, volatility many not increase by much going into earnings, so gain in volatility is very little

2) time erosion ie theta decay.
 
Quote from billp:

Can someone clarify this. Thanks.

I've heard before and this was also mentioned here to buy the front month straddle 1 week before the earnings and to sell it just before the earnings release due to volatility increasing going into earnings.
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I'm not sure anyone suggested buying the front month straddle 1 week before earnings. Rather, you don't want to be short the front month straddle 1 week before earnings.

Normally, you'd want to be long VEGA in advance of 1 week. You want to buy volatility as low as possible and sell high but you have to balance that against time. If you are familiar with earnings-related volatility cycles entry points can become clearer.


Surely there must be some risks involved as no strategy is that simple.
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Who said it was simple? LOL. The max risk in a long straddle is the debit paid for it. The risks are laid out by the greeks of the position. Primarily, short THETA is your main exposure.


1) stock price movement. If price moves too far out from time of purchasing the straddle to before the earnings release, this may negate the profits from volatility increase.
Also, volatility many not increase by much going into earnings, so gain in volatility is very little
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Well, if stock price moves far out that is good for a long straddle LOL.


2) time erosion ie theta decay.
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Looking at time as synthetic volatility you need the real implied volatility increase to trump the synthetic volatility decrease. Being familiar with the magnitude of THETA with respect to time to expiration will allow you to choose appropriate candidates where decay can more easily be mitigated.

In addition, the traditional GAMMA scalping approach is a way of further mitigating any decay in order to capture and isolate the volatility increase.

Good luck!

MoMoney
 
Thx for starting a thread on this specific topic coach. I'm sorry if this is offtopic because it looks like this may be orientated towards stocks? Does volatility trading work as well on futures markets or are they somehow more efficient in their pricing?

Last week I started to periodically peek at the options chains on the Euro Bund and I'm not seeing anything glaringly out of line. Good spreads though, 1-2 ticks!

Kind regards,
MK
 
Momoney.

Thanks. I must be dreaming when I wrote about stock price moving far and thus not good for long straddle. :D

I do have another question pls.


I went to search the post where I initially found the idea. Ok, some correction to my earlier statement. The post mentioned :

Quote by a poster in ET:
You want to be "long" the strangle one week before the announcement. You expect to benefit from increasing volatility(vega), not price movement(delta & gamma). Offset the long position BEFORE the announcement. Then stay flat or get "short" the strangle and then expect to benefit from the "vol crush"(vega) that is expected to take place after the announcement. You're playing it both ways.


My question. You mentioned that one should long vega more than 1 week in advance. How long then do we need to long vega? Roughly/Generally 2 weeks in advance? Thanks.



Quote from momoneythansens:

I'm not sure anyone suggested buying the front month straddle 1 week before earnings. Rather, you don't want to be short the front month straddle 1 week before earnings.

Normally, you'd want to be long VEGA in advance of 1 week. You want to buy volatility as low as possible and sell high but you have to balance that against time. If you are familiar with earnings-related volatility cycles entry points can become clearer.



Who said it was simple? LOL. The max risk in a long straddle is the debit paid for it. The risks are laid out by the greeks of the position. Primarily, short THETA is your main exposure.



Well, if stock price moves far out that is good for a long straddle LOL.



Looking at time as synthetic volatility you need the real implied volatility increase to trump the synthetic volatility decrease. Being familiar with the magnitude of THETA with respect to time to expiration will allow you to choose appropriate candidates where decay can more easily be mitigated.

In addition, the traditional GAMMA scalping approach is a way of further mitigating any decay in order to capture and isolate the volatility increase.

Good luck!

MoMoney
More...
 
Quote from billp:



My question. You mentioned that one should long vega more than 1 week in advance. How long then do we need to long vega? Roughly/Generally 2 weeks in advance? Thanks.
More...

It is not a matter of when you go long the straddle/strangle as the timing is only relevant in the context of your volatility expectation. What mo alluded to is that you generally don't want to go long vega through front month options where the theta convexity falls off a cliff. The front months are best suited for gamma bets. Not saying that it isn't being done, it's just that you will need to solve for the steep time decay somehow to mitigate the risk if your expectation doesn't come to life unless you are content with taking the full debit loss.
 
In my experience, index and interest rate indexes all have low volatility and little skew (i.e., DOW SPX, eetc..) and only have interesting vols when we get a huge spike on a crash or attack. if you can foresee vol expansion or if you feel vols have hit a historic low, you could go long volatility and try and play for the increase in vols.

Remember you can plays vols to crush or to expand, but you have to be right about the vol prediction. it is easier to find situations where vols are ramped up and will collapse then a situation where vols are very low and will pick up unexpectedly or significanlty.

Quote from MidKnight:

Thx for starting a thread on this specific topic coach. I'm sorry if this is offtopic because it looks like this may be orientated towards stocks? Does volatility trading work as well on futures markets or are they somehow more efficient in their pricing?

Last week I started to periodically peek at the options chains on the Euro Bund and I'm not seeing anything glaringly out of line. Good spreads though, 1-2 ticks!

Kind regards,
MK
More...
 
GOOG volatility play

With GOOG vols crushed after last earnings announcement I wanted to put a position on to take advantage of large potential moves over the next few months and an IV ramp up going into the JAN earnings. After experimenting with the Tarzen Loves Jane approach mentioned on other threads, this is the trade I am going to open on Monday(prices from Friday so will be updated on Monday):


- 3 GOOG DEC $530 Calls

+5 GOOG MAR $520 Calls

- 3 GOOG DEC $430 Puts

+ 5 GOOG MAR $470 Puts

Ratio calendar Diagonal

The net debit is about $24,500 but the actual risk at DEC expiration is $6,600 with no vol changes.

However this position is designed to take advantage of increases in vols. It has a $Vega of $860 (i.e. each +1% increases position by $860).. If at December expiration, vols are up at least 7.5% the position has no loss no matter where GOOG is.

It is also +delta so more gains on the upside. negative theta so one bad case scenario is GOOG goes no where for 2 months and vols drop like 10%. Possible but very unlikely.

I will post some screen shots of vol changes.

Beauty is that I can still hold past DEC since I have more MAR longs and I have a lot of adjustments at my disposal. I can sell JAN options and keep rolling to MAR or roll out to MAR to reduce the net debit if I need to.

Lots of possibilities for limited risk, much less than the actual net debit to open.
 
Quote from optioncoach:

In my experience, index and interest rate indexes all have low volatility and little skew (i.e., DOW SPX, eetc..) and only have interesting vols when we get a huge spike on a crash or attack. if you can foresee vol expansion or if you feel vols have hit a historic low, you could go long volatility and try and play for the increase in vols.

Remember you can plays vols to crush or to expand, but you have to be right about the vol prediction. it is easier to find situations where vols are ramped up and will collapse then a situation where vols are very low and will pick up unexpectedly or significanlty.
More...

Thx coach, hearing ya loud and clear.

Kind regards,
MK
 
Placed the following ratio diagonal calendar on GOOG:

BTO 5 GOOG MAR $480 Calls @ $40.60

STO 2 GOOG DEC $520 Calls @ $7.20

STO 2 GOOG DEC $430 Puts @ $4.50

BTO 5 GOOG MAR $460 Puts @ $26.30


Net Debit = ~ $31,000 Actual risk is much less due to time value premiums in MAR options and ability to sell more premium from DEC to MAR to reduce the net overall debit. For example, at DEC expiration, with no vol changes +/- the max loss is just over $7,000.

However if vols spike 10% in DEC, which is a month before JAN earnings report, then the position has no loss at DEC expiration. Position also makes money in large move in either direction. So I will make money as long as GOOG moves up or down big by MAR OR vols spike up leading into JAN earnings announcement.


Quote from optioncoach:

GOOG volatility play

With GOOG vols crushed after last earnings announcement I wanted to put a position on to take advantage of large potential moves over the next few months and an IV ramp up going into the JAN earnings. After experimenting with the Tarzen Loves Jane approach mentioned on other threads, this is the trade I am going to open on Monday(prices from Friday so will be updated on Monday):


- 3 GOOG DEC $530 Calls

+5 GOOG MAR $520 Calls

- 3 GOOG DEC $430 Puts

+ 5 GOOG MAR $470 Puts

Ratio calendar Diagonal

The net debit is about $24,500 but the actual risk at DEC expiration is $6,600 with no vol changes.

However this position is designed to take advantage of increases in vols. It has a $Vega of $860 (i.e. each +1% increases position by $860).. If at December expiration, vols are up at least 7.5% the position has no loss no matter where GOOG is.

It is also +delta so more gains on the upside. negative theta so one bad case scenario is GOOG goes no where for 2 months and vols drop like 10%. Possible but very unlikely.

I will post some screen shots of vol changes.

Beauty is that I can still hold past DEC since I have more MAR longs and I have a lot of adjustments at my disposal. I can sell JAN options and keep rolling to MAR or roll out to MAR to reduce the net debit if I need to.

Lots of possibilities for limited risk, much less than the actual net debit to open.
More...
 
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