OCs Implied Volatility Trading Journal

[momoneythansens]

You guys are nuts! I'm sure Riskarb is turning over in his cyber-grave

Unless I mis-read, I understand one suggestion is to go short straddle into earnings? IV gets pumped up going into earnings. It's preferable to be long straddle (or other long time VEGA) into earnings. Offset position just before report. Gamma scalp for additional gains.

There is no edge on a combo to fly conversion going into earnings!

If you're going short the combo, best to initiate position at last possible moment to capture peak IV. Short straddle before report is not for the faint of heart and is tantamount to gambling in many respects. Need to be ready to hedge with (liquid) underlying after hours with minimal delay. Best to have a decent news service on hand. Playing hedgeless will leave you eating like a chicken but shitting like an elephant...much like FOTM credit spreads IMO.

Skew and expiration cycle permitting, (ratioed) time spreads offer the best risk/reward IMO.

Either:

1) Long the time spread for a cheap OTM bet. It's "cheap" due to the tenor skew.

2) Short the time spread (short VEGA) to capitalize on the volatility crush.

Those with market maker haircut have a massive advantage on the short time spreads. More so when ratioed.

2 cents.

MoMoney.

 

[El OchoCinco]

Actually this is similar to what riskarb was doing.

I am not advocating selling naked straddles for a living. But this stock does not move a lot, even after earnings announcement. So with a straddle at $3.50, a big move for this stock would be $5.00 or so and not even the next day on a gap. Plenty of time to cut the losses or convert through one side of the leg.

 

[Cache Landing]

Quote from momoneythansens:

You guys are nuts! I'm sure Riskarb is turning over in his cyber-grave

............



2 cents.

MoMoney.

I was trying to say the same thing, without so many words. Yes, a short straddle through earnings is risky, but it makes a ton more sense than shorting it up to the release and then buying the wings just before he release. That is a losing strat.

The only logical version of this would be to sell the straddle just before ER and buy the wings after vol crush.

Or if you really want to get cute.

-buy wings two weeks prior and wait for vol spike.

-roll your long strangle into a short straddle just before ER.

-buy the wings back after the vol crush.

-go buy some sleep-aid and try to get some sleep after voluntarily subjecting yourself to securities base jumping.

 

[El OchoCinco]

This was one of the plays riskarb outlined in that journal he was running.

Quote from Cache Landing:



The only logical version of this would be to sell the straddle just before ER and buy the wings after vol crush.

 

[Cache Landing]

Quote from optioncoach:

This was one of the plays riskarb outlined in that journal he was running.

Yep, and I do these every once in a while with small amounts of capital. I was just suggesting to tplast that buying the wings just before ER is pointless. If you're shorting the straddle, that is the part that needs to be done at the last moment. If you're gonna buy the wings prior to ER, it should generally be done a couple weeks earlier. I still say holding the naked straddle through ER can be worth it if you have a stomach of steel and pick the right companies.

It should be noted that riskarb generally liked to sell an OTM straddle if he had a directional bias.

 

[tplast]

Quote from Cache Landing:

Yep, and I do these every once in a while with small amounts of capital. I was just suggesting to tplast that buying the wings just before ER is pointless. If you're shorting the straddle, that is the part that needs to be done at the last moment. If you're gonna buy the wings prior to ER, it should generally be done a couple weeks earlier. I still say holding the naked straddle through ER can be worth it if you have a stomach of steel and pick the right companies.

It should be noted that riskarb generally liked to sell an OTM straddle if he had a directional bias.

Thanks. I was missing the fact that IV will keep increasing as earnings approach. I was thinking sell expensive straddle first, buy cheap wings later, profit!. That's why it was on the too good to be true territory


I don't have the guts to hold them naked into earnings. I guess I'll stick to calendars .

 

[El OchoCinco]

Yes, I was mentioning ONE way only to play the vol skew going into earnings. Obviously the riskier of the options. YOu can still play the vols using calendars which has more limited risk.

 

[Cache Landing]

Quote from tplast:

Thanks. I was missing the fact that IV will keep increasing as earnings approach. I was thinking sell expensive straddle first, buy cheap wings later, profit!. That's why it was on the too good to be true territory


I don't have the guts to hold them naked into earnings. I guess I'll stick to calendars .

Yes it seems gutsier, but in all honesty it has been my experience that the success rate is about the same in the end. Most times the earnings move is less than that which is priced into the straddle, so the vol crush will save you. Think of it this way. If a calendar profits from an ER then a short straddle to fly conversion definitely wouldv'e. But the reverse is not true. The calendar behaves similarly to the straddle-to-fly except that the longs also get hurt by the vol crush.

If you want to do the straddle-to-fly I would say go for it, but keep the following in mind.

1) Each position has the potential to payoff big, but only at expiry. You'll get a much better vol skew a week or two before expiry. These are not "bet the farm" trades. DO NOT OVERTRADE THESE.

2) Stay away from tech companies and biotech. They have the most lucrative vol skews but there is a reason for it. You want tickers like GE that rarely surprise on earnings.

3) You want tickers that generally hold still after ER too. Part of the money is made from the vol crush, but if that part is successful and the company is a slow mover, then holding till expiry results in huge profits.

 

[momoneythansens]

Sometimes it must feel like you get no thanks for all your contributions on ET Just a never ending stream of critics taking pot shots at your ideas...

Quote from optioncoach:
Actually this is similar to what riskarb was doing.

I realize there were some earnings oriented combo trades in the journal and by the time the journal was dying of natural causes people were using the strategy on earnings candidates. However, I don't think that was the intention of the journal at the outset and for good reason. So, despite the similarities, the differences are significant IMO.

But this stock does not move a lot, even after earnings announcement. So with a straddle at $3.50, a big move for this stock would be $5.00 or so and not even the next day on a gap. Plenty of time to cut the losses or convert through one side of the leg.

OK, if you feel you have a statistical edge with this particular stock vis-a-vis market over-pricing the straddle, then fair enough. Absent insider info going into earnings, I hypothesize you will eat like a chicken only later, one day to shit like an elephant! :eek: Only IV_Trader knows what's going to happen after report

MoMoney.

 

[El OchoCinco]

Not market over pricing the straddle, that the potential for a large move is a few points past the straddle for this stock so I view it as an acceptable risk in this specific case. This is a lending company not a bio tech. If the stock drops 5 points at the open then I am taking maybe a 2 point loss with the IV crush.

Quote from momoneythansens:

Sometimes it must feel like you get no thanks for all your contributions on ET Just a never ending stream of critics taking pot shots at your ideas...



I realize there were some earnings oriented combo trades in the journal and by the time the journal was dying of natural causes people were using the strategy on earnings candidates. However, I don't think that was the intention of the journal at the outset and for good reason. So, despite the similarities, the differences are significant IMO.



OK, if you feel you have a statistical edge with this particular stock vis-a-vis market over-pricing the straddle, then fair enough. Absent insider info going into earnings, I hypothesize you will eat like a chicken only later, one day to shit like an elephant! :eek: Only IV_Trader knows what's going to happen after report

MoMoney.