OCs Implied Volatility Trading Journal

El OchoCinco · Oct 25, 2006

Well the first one was an earnings play and I did research selling the ATM combo but the premiums are pretty small. I may wait a few mroe days for IV to ratchet up.

For Northfield, that is an FDA issue so do not want to be naked

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Quote from Cache Landing:

You seem to like the home run bets on earnings. I tend to lean toward the ATM combo to fly conversion. In any case, good luck. I look forward to stealing some tickers from you so I can cut down my research workload.

Cache Landing · Oct 25, 2006

Quote from optioncoach:

Well the first one was an earnings play and I did research selling the ATM combo but the premiums are pretty small. I may wait a few mroe days for IV to ratchet up.

For Northfield, that is an FDA issue so do not want to be naked .

Agreed. I would never leave myself naked on one of those. I was playing one last year that had a 3rd stage trial announcement due out within the month. If I remember correctly the underlying gapped almost 30% on the news. Any "hedged' position becomes unmanageable under those circumstances.

El OchoCinco · Oct 26, 2006

Next candidate: TELK Telik Inc.

Bio-tech working on ovarian cancer studies. This has a huge reverse skew.

NOVs ATM are around 80/85% and DEC ATMs are 105%. JAN07 ATMs are near 116%.

Earnings report on NOV 6th but the DEC and JAN lead me to believe they may have a clinical trial report release coming at the end of the year.

Thoughts to play this? Earnings are usually not major events since most of these companies are in the red until their drug trials are approved and they start selling product and stop spending on research. But nice reverse skew.

One could look into reverse calendars for possible IV crunch after earnings although I doubt IV will drop if a trial study result might be released at the end of the year.

Interesting to watch but not sure yet how to take advantage of this skew since there is no specific date to trade to.

El OchoCinco · Oct 27, 2006

CCRT - Compucredit Corp

Earnings on Nov 6, 2006. Chart has shown a bullish move recently. Pricing in earnings? Maybe. Hopefully it is not buy on the news and sell on the rumor.

Looking at NOV/DEC Long $40 Call Calendar for limit of $0.30 perhaps. Myabe do 30 of these. Looking at short straddle going into earning and then converting to Iron Fly.

leaning towards selling 10 $35 Straddles at $3.60 and legging into Iron FLY if market starts to move against me.

tplast · Oct 27, 2006

Coach, can you expand on the timing of the short straddle to fly conversions?

You are selling the straddle ahead of earnings and then buying the wings to convert it to an iron fly right before the announcement?

El OchoCinco · Oct 27, 2006

Well on this candidate I do not think short combo to FLY would work given the small premium. The idea is that after earnings there will be an IV crush and hopefully a small move in the stock. This will allow me to either buy back the straddle for a profit or convert to IRON FLY at hopefuly a net credit or very small debit. Then leave the position to expiration to see if the stock finishes in the profit zone (Riskarb described this in more detail).

However the short straddle here is about $3.50. Converting to Iron Fly would result in large net debit. However if the stock starts moving after or up to the earnings one possibility is to convert to Iron FLY if I feel the stock will stay outside the range and I can grab the wings for $3.50 or less. This leaves open the risk of the stock moving back to the short strike by expiration so I would not advise unless you really expect the stock to keep moving.

As for the stock at hand, I may sell 4 short straddles and let it run to earnings in a week or so but I am leaning towards waiting since we may get more IV increase into next week.

Will watch this one...

Quote from tplast:

Coach, can you expand on the timing of the short straddle to fly conversions?

You are selling the straddle ahead of earnings and then buying the wings to convert it to an iron fly right before the announcement?

tplast · Oct 27, 2006

Quote from optioncoach:

However the short straddle here is about $3.50. Converting to Iron Fly would result in large net debit. However if the stock starts moving after or up to the earnings one possibility is to convert to Iron FLY if I feel the stock will stay outside the range and I can grab the wings for $3.50 or less. This leaves open the risk of the stock moving back to the short strike by expiration so I would not advise unless you really expect the stock to keep moving.

You can convert them for a credit by buying the 30 puts and 40 calls instead of the other way around. You end up with the same profile.

El OchoCinco · Oct 27, 2006

that is what I meant, buying the OTM calls and puts to convert to IRON FLY.

Quote from tplast:

You can convert them for a credit by buying the 30 puts and 40 calls instead of the other way around. You end up with the same profile.

tplast · Oct 27, 2006

Quote from optioncoach:

that is what I meant, buying the OTM calls and puts to convert to IRON FLY.

I thought you were talking about the ITM strikes because you mentioned a debit. In any case, it is exactly the same play.

I like the idea of buying the wings right before earnings. The max profit would probably be less, but waiting after earnings may be too late.

Cache Landing · Oct 27, 2006

Quote from tplast:

I thought you were talking about the ITM strikes because you mentioned a debit. In any case, it is exactly the same play.

I like the idea of buying the wings right before earnings. The max profit would probably be less, but waiting after earnings may be too late.

If you pick your companies wisely, I would difinitely buy the wings after the earnings have come out. Huge vol crush on the front months and a much cheaper entry on the back month wings. Then after the initial risk you are in a no lose position that has huge upside potential.

Obviously this is not without some large risks. I'd stay away from biotechs tech companies. Your looking for normal companies, like financials that don't have very big surprises. Also, in my experience there is a trend in the magnitude of earnings related moves. That is, this month the moves have been larger on average than what was priced into the ATM straddle. Most times the reverse is true, but we are in a rally so good earnings are great, and bad earnings are horrible.