Options Earnings Trades

You can derive the forward vol between 2 months (or any maturity). So ATM Apr-27 IV is 48 and ATM May-04 is 58... Since up until Apr 27th they will have the same volatility, it implies that the volatility after April 27th should be higher than before... since May-04 is higher.

That equates to a forward vol of about 68 between these dates....

So, you could argue that that would roughly be the vol after the Apr epxiry. Which seems fair, since an IV of 68 with 7 days to go gives a straddle of 7.5% of the underlying... Don't know what Tesla's straddle usually does in the week before earnings, but this seems fair/cheap.

Regarding that spike... was that at one of the prior cycles? Maybe you should look at whether it's an outlier or not... then maybe exclude it.

IV changes also depends heavily on then the earnings release is relative to the next expiry. The close to expiry it is, the more severe the run-up will be, especially if it's a big mover stock.

Nice job though... looking fwd to you results :)
 
I don't think it is an outlier. If you look at the first chart I break out min/max/median. The theta calculation is based on the median.
 
I understand how to calculate forward vol. Why do you want to calculate it for a trade like this? I'm not arguing with you I just don't understand what you're looking at from the trade perspective or what your assumption is that makes it important.
 
JackRab said:
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%...
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I also thought the same thing I’ve played earnings before. A week or two before I usually buy the front month ATM options or if earnings is within a week of expiration I go the following month since theta decay is greatest at the end of the options life. I always look at monthly as weekly tend to have less liquidity meaning bigger bid/ask. I’ve also done vertical debit spreads to help mitigate theta decay and the IV in the ATM increases it’s value far in excess of the OTM. The IV value seems to generally increase all the way up to the day of the event in my experience sometimes so much so I’ve been tempted to close the position prior to earnings, since if there’s no significant move the Volatility crush hurts the premium. I’ve always kept in mind a couple of catalyst options strategies. Boxes, butterflies, condors, strangles, straddles both buying and selling these strategies. Buying vol leading up to the event and selling vol positions the day before.

Like you I just find it interesting that the models are showing such an early increase in IV when in my experience I’ve noticed IV seems to peak up until the event, then dissipates right after. Initially I didn’t want to say anything and question the model, figuring it’s computer based and considered more than o have. The worst thing about option trading is it’s hard to get historical charting data on options since they are constantly expiring, even harder multiple leg strategies, so it’s hard to look at history of what’s happened for years. The only way to really learn for retail is to watch these events in real time enough times as opposed to back testing.
 
jjapp said:
I understand how to calculate forward vol. Why do you want to calculate it for a trade like this? I'm not arguing with you I just don't understand what you're looking at from the trade perspective or what your assumption is that makes it important.
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I'm not arguing either... I'm just saying that the forward vol is useful in estimating the rise in IV leading up to the earnings... Just giving you a tip...
 
JackRab said:
I'm not arguing either... I'm just saying that the forward vol is useful in estimating the rise in IV leading up to the earnings... Just giving you a tip...
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Yeah but why would you use that if you've gone through the trouble to build a time series?
 
jjapp said:
Yeah but why would you use that if you've gone through the trouble to build a time series?
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Reaffirmation? If the two add up you can be more convinced... if they don't, there might be something else that's wrong or that you don't know of or missed.

If you would run all on an algo, and for some reason you've missed a fwd looking statement that already moved the stock x weeks ago... you'd maybe buying into a fruitless straddle. And, if you didn't miss anything... then you could maybe go bigger.

Your time series is past only, the fwd vol gives you an idea of general market prognoses.
 
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