OCs Implied Volatility Trading Journal

[jychiu]

Thank you for repeating this.

While doing the study, I noted that the IV increase might only occur to the front month contract, and not even to the next month.

Take the case of Sears SHLD, it has delayed the announcement of earning recently. On 8 Nov, the company announced that the earning announcement will be made on 16 Nov, the IV of the front month Nov contract went 10+ point to 46% (ATM) and not so much on the next month Dec contract (33%).

Going toward the earning announcement, on 13 Nov, the IV of front month NOv contract went up to 72 % (ATM) and the Dec contract only increased by 3 points (36%). Please see the attached option price chain for some detail.



This behaviour should be quite common on other counters as well. Managed to look at AAPL. In the last earning announcement, AAPL made announcement on 18 Oct 2006 :
Market close on 11 Oct 2006, AAPL at $73.13
Oct 80 Call QAAJP at $0.7 IV=60.9%
Nov 80 Call QAAKP at $1.75 IV=43.5%

Market close on 17 Oct 2006 at $74.35
Oct 80 Call QAAJP at $0.45 IV=79.3%
Nov 80 Call QAAKP at $1.725 IV=42.5%

So the IV increase is most likely on the front month, it might or might not increase that siginificantly on the next month or back month contract.

Quote from optioncoach:

If you know for a fact that the earnings will be in JAN expiration then that is the month you want to be long. I chose APR to give me more time to play the directional side and to push up my vegas so even smaller moves in IV will help the position.

When DEC expires, I can still add JAN positions to take advantage of IV spike. Whether short or long, you can use the IV spike to your advantage .

 

[jychiu]

Going for front month IV increase likelihood, done the following orders :

1) AAPL at $84.8 on 14 Nov 2006 at 1,960 debit, next earning date : 17 Jan 2007 amc
STO 1 Dec $90 Call at $1.25
BTO 2 Jan $85 Call at $5.66
BTO 2 Jan $85 Put at $4.94
STO 1 Dec $75 Put at $0.35

2) EBAY at $33.0 on 14 Nov 2006 at $720 debit, next earning date : 18 Jan 2007 amc
STO 1 Dec $35 Call at $0.45
BTO 2 Jan $32.5 Call at $2.3
BTO 2 Jan $32.5 Put at $1.55
STO 1 Dec $27.5 Put at $0.05

3) SNDK at $46.0 on 14 Nov 2006 at $1,155 debit, next earning date : 18 Jan 2007 amc
STO 1 Dec $47.5 Call at $1.8
BTO 2 Jan $45 Call at $4.24
BTO 2 Jan $45 Put at $2.61
STO 1 Dec $40 Put at $0.35

4) YHOO at $27.2 on 13 Nov 2006 at $975 debit, next earning date : 17-18 Jan 2007 ?
STO 1 Dec $30 Call at $0.3
BTO 2 Apr $27.5Call at $2.83
BTO 2 Apr $27.5 Put at $2.22
STO 1 Dec $22.5 Put at $0.05

Let see how it goes !

 

[rallymode]

Quote from jychiu:


While doing the study, I noted that the IV increase might only occur to the front month contract, and not even to the next month.

Take the case of Sears SHLD, it has delayed the announcement of earning recently. On 8 Nov, the company announced that the earning announcement will be made on 16 Nov, the IV of the front month Nov contract went 10+ point to 46% (ATM) and not so much on the next month Dec contract (33%).

Ok. I've seen this mentioned a few times in this thread and it is actually silly. There is no such thing as vols spike in the front months and not in the back. The reason SHLD's implieds went to 72 has nothing to do with vols increasing. It is only because time passed and you now have only a few days to expiration. On Thursday, all else being equal the implieds will go over 90 while vols may actually decrease. Doing a long vega bet based on this "spike" is crraaazzzzyyyyy but carry on.

 

[RCMLLC]

Just FYI.... when you say front month, it is incorrect since that is the long legs of the calendarized spread. If you are long the Jan contracts and short Dec, then Jan will be the back month. Maybe you know that but I just want to clear that up for others should they don't know.

Also, SHLD did not delay its earning announcement. They usually do not pre-announce the earning date until a week or two before it comes out. They do this all the time.

Quote from jychiu:

Thank you for repeating this.

While doing the study, I noted that the IV increase might only occur to the front month contract, and not even to the next month.

Take the case of Sears SHLD, it has delayed the announcement of earning recently. On 8 Nov, the company announced that the earning announcement will be made on 16 Nov, the IV of the front month Nov contract went 10+ point to 46% (ATM) and not so much on the next month Dec contract (33%).

Going toward the earning announcement, on 13 Nov, the IV of front month NOv contract went up to 72 % (ATM) and the Dec contract only increased by 3 points (36%). Please see the attached option price chain for some detail.



This behaviour should be quite common on other counters as well. Managed to look at AAPL. In the last earning announcement, AAPL made announcement on 18 Oct 2006 :
Market close on 11 Oct 2006, AAPL at $73.13
Oct 80 Call QAAJP at $0.7 IV=60.9%
Nov 80 Call QAAKP at $1.75 IV=43.5%

Market close on 17 Oct 2006 at $74.35
Oct 80 Call QAAJP at $0.45 IV=79.3%
Nov 80 Call QAAKP at $1.725 IV=42.5%

So the IV increase is most likely on the front month, it might or might not increase that siginificantly on the next month or back month contract.

 

[jychiu]

Coach,

ivolatility.com shows the past 1 year the IV range for DNA is ony 20-39%, is it sufficient for such play ?

Quote from optioncoach:

New Candidate DNA

Vols are at lowest percentile but spike regularly at earnings. next should be scheduled for early JAN so looking at JAN/DEC diagonal ratio spread.

Just in case earnings are not in time for the JAN cycle, I may do longs in MAR and JAN and shorts in DEC to cover the time frame for any vol increase as well as a move in either direction.

 

[jychiu]

Could you share your ideas of vega play since you mentioned that you have the intention to start one ? Any good strategy to play IV increase toward the earning date ?

Quote from rallymode:

Ok. I've seen this mentioned a few times in this thread and it is actually silly. There is no such thing as vols spike in the front months and not in the back. The reason SHLD's implieds went to 72 has nothing to do with vols increasing. It is only because time passed and you now have only a few days to expiration. On Thursday, all else being equal the implieds will go over 90 while vols may actually decrease. Doing a long vega bet based on this "spike" is crraaazzzzyyyyy but carry on.

 

[jychiu]

Managed to do backtest on AMZN which announced its last quarter earning on 24 Oct 2006 (Oct expiration is 20 Oct).

On 18 Sep AMZN at $32.08, do a position of the following RCD :
Sell 1 Oct $35 Call price ?
Buy 2 Nov $32.5 Call ZQNKZ at $2.1 IV=41.9%
Buy 2 Nov $32.5 Put ZQNWZ at $2.275 IV=42.3%
Sell 1 Oct $27 Put at price ?

On 17 Oct, a few days before the earning annoucement, the price chain of AMZN at $32.47
Sell 2 Nov $32.5 Call ZQNKZ at $2.225 IV=57.7%
Sell 2 Nov $32.5 Put ZQNWZ at $2.1 IV=57.2%

In this case, it shows that the IV increases 15% over one month time towards the earning date, with the price remains the same, the position breakeven.

 

[jychiu]

When I mentioned front month in this context, it is referenced near to the earning date and not at the point of entering a position. Thank you for pointing this misleading quote.

As for SHLD, thank you for pointing out their company behaviour in earning announcement. For this year, they made the earning announcement in May, Aug and Nov 2006, so it is good trading opportunity for long straddle or strangle about one month time ahead to anticipate the IV spike. Is there any other companies that have the similar behaviour ?

Quote from RCMLLC:

Just FYI.... when you say front month, it is incorrect since that is the long legs of the calendarized spread. If you are long the Jan contracts and short Dec, then Jan will be the back month. Maybe you know that but I just want to clear that up for others should they don't know.

Also, SHLD did not delay its earning announcement. They usually do not pre-announce the earning date until a week or two before it comes out. They do this all the time.

 

[El OchoCinco]

It is hard to really see what happened with half the picture and without the actual prices from those times. Also the stock hardly moved. AMZN does not tend to move too much in my opinion so not the best candidate for me. But keep running through the scenerios as it is adding different questions to the strategy.

Quote from jychiu:

Managed to do backtest on AMZN which announced its last quarter earning on 24 Oct 2006 (Oct expiration is 20 Oct).

On 18 Sep AMZN at $32.08, do a position of the following RCD :
Sell 1 Oct $35 Call price ?
Buy 2 Nov $32.5 Call ZQNKZ at $2.1 IV=41.9%
Buy 2 Nov $32.5 Put ZQNWZ at $2.275 IV=42.3%
Sell 1 Oct $27 Put at price ?

On 17 Oct, a few days before the earning annoucement, the price chain of AMZN at $32.47
Sell 2 Nov $32.5 Call ZQNKZ at $2.225 IV=57.7%
Sell 2 Nov $32.5 Put ZQNWZ at $2.1 IV=57.2%

In this case, it shows that the IV increases 15% over one month time towards the earning date, with the price remains the same, the position breakeven.

 

[El OchoCinco]

I ran some tests on DNA and nothing really jumped out at me. The price has been in too tight a range over the past 6 months or so and the IV spikes have been pretty tame relatively (5 points or so).

Therefore I am not going to enter any trade on DNA.

Quote from jychiu:

Coach,

ivolatility.com shows the past 1 year the IV range for DNA is ony 20-39%, is it sufficient for such play ?