Options Earnings Trades

J

jjapp

I placed two trades on underlying stocks this morning with upcoming earnings calls to try and capture the rise in IV. The trade idea is based on some of the stuff Jeff Augen wrote over the years on trading the earnings cycle:
1. TSLA:

Long the May4th 297.5 Straddle for 30.55.
Long the May4th 42 VXX Put Option (Market Vol hedge)

Ratio: 1 Straddle to one Put.

TSLA IV Ramp over the last 8 cycles:

upload_2018-4-18_9-5-23.png


Impact on Theta Decay:

upload_2018-4-18_9-7-16.png


Plan to exit on the 23rd.

2. EW:

Long the April 27th 140-141 Strangle for 9.05
Long the April 27th 48.5 VXX Put for 8.

Ratio: 5 strangles to one put.

EW IV Ramp over the last 8 cycles:

upload_2018-4-18_9-8-20.png


Impact on Theta Decay:

upload_2018-4-18_9-9-19.png


Plan to exit Friday the 20th.
 
Its something I developed myself. I got tired of trying to build this stuff using excel.

It pulls the IV data after market hours for all stocks in my list and then I have new forecasts run quarterly. I'm still developing it but if you want to mess around with it send me a PM and I'll get you a link. Feedback from people who do these types of trades would be helpful.
 
jjapp said:
It pulls the IV data after market hours for all stocks in my list...
More...

I would scrape that sample off at least 30 minutes prior to cash close. After that, the spreads start to meander away from the day's 'action points' like "If we back up real slow, nobody will notice." and you end up with a lot more anomalous prices than you need. It gets plainly bad about 10 minutes to go, and ridiculous about 5 minutes to go.
 
Why do you hedge for market vol? In my experience earnings vols aren't really affected by market vol... except in the extreme cases. But then the earnings aren't the main focus anyway.

What if you would sell an OTM strangle with a shorter maturity? Say a 280/310 APR 27th strangle for Tesla, or a bit tighter? That will probably give you positive real theta and positive gamma... since that May 04th straddle will likely keep most of it's value. That straddle surely will be worth more than 7% at earnings release?

You would probably hold a bit longer, till after April 27th expiry.
 
When I've run the data I've found some covariance between market IV and individual equity options IV. Usually it doesn't matter but this last week it did with a large drop in market IV. I'm actually working on adding that calculation to my app automatically and should have it up in the next couple of weeks. Once I have that I'll be able to be a little more precise with exactly how much I hedge...right now I'm using a simple heuristic.

You can definitely sell shorter duration strangles but I prefer to keep the gamma and then hedge back to delta neutral over the holding period. I haven't done the work to see if one strategy does better over the long-term...it is just what I've had more success with recently. There are definitely scenarios where short strangles would work better.

I'm still debating on holding period but I've found to date that I get most of my really good gains up until the point the avoided theta chart flattens out. I'm not sure to be honest if that is the best way to think about it though. There is an argument to be made for holding the trade longer.
 
jjapp said:
I'm still debating on holding period but I've found to date that I get most of my really good gains up until the point the avoided theta chart flattens out. I'm not sure to be honest if that is the best way to think about it though. There is an argument to be made for holding the trade longer.
More...

So how do you forecast the IV rise? Why is the Tesla 'jump' so early? I would expect it to rise gradually going up stronger the closer we get to earnings... depending on what maturity we're looking at.

Do you also look at the relevant forward vols? For instance, if I look at Tesla, the forward vol between APR 27th and MAY 4th is about 68, which indicates the IV after that April expiry would be roughly 68... likely going up, keeping the straddle above 7%...
 
I forecast IV rise based on the last 8 cycles. Right now I'm just looking at median, min and max rise from that 8 cycle period. The 8 cycles number is configurable but it seemed like a good starting point. Why does it spike early? No idea. That is what the data reflects though and that isn't all that abnormal based on what I've seen. It caught me by surprise too though when I started this. I thought you would see the gradual rise you talk about too. You do see that with some stocks (RHT comes to mind.)

For TSLA I traded the May 4th options not the April 27th. I trade the first expiry following the expected earnings call. I'm not sure if that answers your forward vol question but I'm generally just worried about the IV on that first expiry.
 
Oh...I may have missed what you were asking...the forecast for IV is just based on the front expiry...not the later months.
 
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