Overnight Strategy for surprise events (ER's etc.)

[mutluit]

What do you think of the following overnight options strategy?

The table is created using Black-Scholes for the outcomes of the next day.
The first col is pricechg% of the underlying, the 2nd col ist just a normalized scale where the current price of the underlying was assumed to be 100 when the position was opened, and the last col is the outcome of the strategy, ie the P/L in %.
As can be seen the risk is limited to 5%.

  10.00  110.00:    323.9
   9.75  109.75:    307.0
   9.50  109.50:    290.5
   9.25  109.25:    274.5
   9.00  109.00:    259.0
   8.75  108.75:    244.0
   8.50  108.50:    229.4
   8.25  108.25:    215.3
   8.00  108.00:    201.7
   7.75  107.75:    188.5
   7.50  107.50:    175.8
   7.25  107.25:    163.6
   7.00  107.00:    151.8
   6.75  106.75:    140.4
   6.50  106.50:    129.6
   6.25  106.25:    119.1
   6.00  106.00:    109.2
   5.75  105.75:     99.6
   5.50  105.50:     90.5
   5.25  105.25:     81.9
   5.00  105.00:     73.6
   4.75  104.75:     65.8
   4.50  104.50:     58.5
   4.25  104.25:     51.5
   4.00  104.00:     45.0
   3.75  103.75:     38.8
   3.50  103.50:     33.1
   3.25  103.25:     27.8
   3.00  103.00:     22.9
   2.75  102.75:     18.4
   2.50  102.50:     14.3
   2.25  102.25:     10.6
   2.00  102.00:      7.3
   1.75  101.75:      4.4
   1.50  101.50:      1.9
   1.25  101.25:     -0.2
   1.00  101.00:     -1.9
   0.75  100.75:     -3.3
   0.50  100.50:     -4.2
   0.25  100.25:     -4.8
   0.00  100.00:     -5.0
  -0.25   99.75:     -4.8
  -0.50   99.50:     -4.1
  -0.75   99.25:     -3.1
  -1.00   99.00:     -1.7
  -1.25   98.75:      0.0
  -1.50   98.50:      2.2
  -1.75   98.25:      4.8
  -2.00   98.00:      7.8
  -2.25   97.75:     11.3
  -2.50   97.50:     15.1
  -2.75   97.25:     19.3
  -3.00   97.00:     24.0
  -3.25   96.75:     29.1
  -3.50   96.50:     34.7
  -3.75   96.25:     40.6
  -4.00   96.00:     47.1
  -4.25   95.75:     53.9
  -4.50   95.50:     61.3
  -4.75   95.25:     69.1
  -5.00   95.00:     77.4
  -5.25   94.75:     86.1
  -5.50   94.50:     95.4
  -5.75   94.25:    105.1
  -6.00   94.00:    115.3
  -6.25   93.75:    126.1
  -6.50   93.50:    137.3
  -6.75   93.25:    149.1
  -7.00   93.00:    161.4
  -7.25   92.75:    174.3
  -7.50   92.50:    187.6
  -7.75   92.25:    201.6
  -8.00   92.00:    216.1
  -8.25   91.75:    231.1
  -8.50   91.50:    246.7
  -8.75   91.25:    262.9
  -9.00   91.00:    279.6
  -9.25   90.75:    296.9
  -9.50   90.50:    314.8
  -9.75   90.25:    333.3
 -10.00   90.00:    352.3

 

[trader198]

most mine options are overnight even days.

I do not think yours are called startegy, elementary grade 3 math will not work.

trading needs phililosophy, mind. the nerve to execute an idea, follow the plan.not math.

Quote from mutluit:

What do you think of the following overnight options strategy?

The table is created using Black-Scholes for the outcomes of the next day.
The first col is pricechg% of the underlying, the 2nd col ist just a normalized scale where the current price of the underlying was assumed to be 100 when the position was opened, and the last col is the outcome of the strategy, ie the P/L in %.
As can be seen the risk is limited to 5%.

  10.00  110.00:    323.9
   9.75  109.75:    307.0
   9.50  109.50:    290.5
   9.25  109.25:    274.5
   9.00  109.00:    259.0
   8.75  108.75:    244.0
   8.50  108.50:    229.4
   8.25  108.25:    215.3
   8.00  108.00:    201.7
   7.75  107.75:    188.5
   7.50  107.50:    175.8
   7.25  107.25:    163.6
   7.00  107.00:    151.8
   6.75  106.75:    140.4
   6.50  106.50:    129.6
   6.25  106.25:    119.1
   6.00  106.00:    109.2
   5.75  105.75:     99.6
   5.50  105.50:     90.5
   5.25  105.25:     81.9
   5.00  105.00:     73.6
   4.75  104.75:     65.8
   4.50  104.50:     58.5
   4.25  104.25:     51.5
   4.00  104.00:     45.0
   3.75  103.75:     38.8
   3.50  103.50:     33.1
   3.25  103.25:     27.8
   3.00  103.00:     22.9
   2.75  102.75:     18.4
   2.50  102.50:     14.3
   2.25  102.25:     10.6
   2.00  102.00:      7.3
   1.75  101.75:      4.4
   1.50  101.50:      1.9
   1.25  101.25:     -0.2
   1.00  101.00:     -1.9
   0.75  100.75:     -3.3
   0.50  100.50:     -4.2
   0.25  100.25:     -4.8
   0.00  100.00:     -5.0
  -0.25   99.75:     -4.8
  -0.50   99.50:     -4.1
  -0.75   99.25:     -3.1
  -1.00   99.00:     -1.7
  -1.25   98.75:      0.0
  -1.50   98.50:      2.2
  -1.75   98.25:      4.8
  -2.00   98.00:      7.8
  -2.25   97.75:     11.3
  -2.50   97.50:     15.1
  -2.75   97.25:     19.3
  -3.00   97.00:     24.0
  -3.25   96.75:     29.1
  -3.50   96.50:     34.7
  -3.75   96.25:     40.6
  -4.00   96.00:     47.1
  -4.25   95.75:     53.9
  -4.50   95.50:     61.3
  -4.75   95.25:     69.1
  -5.00   95.00:     77.4
  -5.25   94.75:     86.1
  -5.50   94.50:     95.4
  -5.75   94.25:    105.1
  -6.00   94.00:    115.3
  -6.25   93.75:    126.1
  -6.50   93.50:    137.3
  -6.75   93.25:    149.1
  -7.00   93.00:    161.4
  -7.25   92.75:    174.3
  -7.50   92.50:    187.6
  -7.75   92.25:    201.6
  -8.00   92.00:    216.1
  -8.25   91.75:    231.1
  -8.50   91.50:    246.7
  -8.75   91.25:    262.9
  -9.00   91.00:    279.6
  -9.25   90.75:    296.9
  -9.50   90.50:    314.8
  -9.75   90.25:    333.3
 -10.00   90.00:    352.3

 

[mutluit]

Quote from trader198:
most mine options are overnight even days.

I do not think yours are called startegy, elementary grade 3 math will not work.

trading needs phililosophy, mind. the nerve to execute an idea, follow the plan.not math.

This is not elementary grade 3 maths.

And: maths is all, a strategy that is not based on maths is guestimate, throwing a dart.

 

[kapw7]

Black-Scholes is probably not the best model for "surprise overnight events". But even assuming that it is OK and thus your values are correct then the big question is: In order to make a profit you need to have a better estimate of the risk than the market's. Imagine that a market maker will assess risk and make a similar table like yours most likely with a better pricing model and better info and then will give you the best possible price for you but the one that you can never make a profit (which will be his loss). Do you think you have this edge? I don't say it's impossible just wondering what kind of approach you are taking on this.

 

[mutluit]

Quote from kapw7:
Black-Scholes is probably not the best model for "surprise overnight events". But even assuming that it is OK and thus your values are correct then the big question is: In order to make a profit you need to have a better estimate of the risk than the market's. Imagine that a market maker will assess risk and make a similar table like yours most likely with a better pricing model and better info and then will give you the best possible price for you but the one that you can never make a profit (which will be his loss). Do you think you have this edge? I don't say it's impossible just wondering what kind of approach you are taking on this.

As said, the risk is limited to 5%, regardless of where the underlying goes. If it goes up OR down then the better the result. One loses the 5% only if the underlying doesn't move an iota. The risk zone from the table is the zone between +1.25% and -1.0%, 0% movement representing the most risk.
But since it is to be used for surprise events (Earning Reports etc), one can expect the price to make a movement into the profit zone, either up or down doesn't matter with that options strategy construct.

 

[kapw7]

What volatility value did you use to calculate these figures?

 

[mutluit]

Quote from kapw7:
What volatility value did you use to calculate these figures?

Vola=20%, Interest=0.5%, t=40 days, using YearTradeDays=253; ie. equals to 365.25/253*40=58 calendar days, ie. about 2 months till maturity. There are some more params but I cannot make them public...

BTW, I can create such tables for any risk value, not just the shown 5%, but also for example 2.5%.
The old saying holds: the more risk the more the reward..., but that's normal, expected, and of course has be so...

 

[newwurldmn]

Ground breaking ideas here.

Am i missing something or did you just show the payout of a straddle? Are you saying that you have an edge because you are using black-scholes?

 

[kapw7]

Quote from mutluit:

Vola=20%, Interest=0.5%, t=40 days, using YearTradeDays=253; ie. equals to 365.25/253*40=58 calendar days, ie. about 2 months till maturity. There are some more params but I cannot make them public...

BTW, I can create such tables for any risk value, not just the shown 5%, but also for example 2.5%.
The old saying holds: the more risk the more the reward..., but that's normal, expected, and of course has be so...

In your example, before an earnings report usually the IV is increasing a lot. So if you put something like 60% as your vol value then your "profit zone" is going to become narrower.

If you buy the option 2 months before earnings, then you might profit from the spike of the IV the last days before earnings but it won't be enough to cover the loss from time decay in the period before the spike if the vol stays low for that time.

The point I am trying to make without getting into a lot of detail that I don't know very well is that when you buy (or sell) a fairly priced option then the best you can expect is to break even if your pricing is as good as the market's. If it's worse you will lose and if it's better you might profit. My understanding is that usually the market has the best possible price so it is impossible to beat that.

That's why I am asking what do you think is giving you an edge and obviously you wouldn't reveal this in detail but maybe give us a better idea.

 

[mutluit]

Quote from kapw7:
In your example, before an earnings report usually the IV is increasing a lot. So if you put something like 60% as your vol value then your "profit zone" is going to become narrower.

true.
Just for the record:
for vola=60% and the same other params as before the best I could find is this one: the max risk is 4.58%, and the risk zone lies between +4% to -3.5% of pricechg of the underlying.

  10.00  110.00:    25.00
   9.75  109.75:    23.51
   9.50  109.50:    22.06
   9.25  109.25:    20.65
   9.00  109.00:    19.28
   8.75  108.75:    17.95
   8.50  108.50:    16.65
   8.25  108.25:    15.39
   8.00  108.00:    14.17
   7.75  107.75:    12.99
   7.50  107.50:    11.85
   7.25  107.25:    10.74
   7.00  107.00:     9.67
   6.75  106.75:     8.64
   6.50  106.50:     7.65
   6.25  106.25:     6.70
   6.00  106.00:     5.78
   5.75  105.75:     4.91
   5.50  105.50:     4.07
   5.25  105.25:     3.27
   5.00  105.00:     2.51
   4.75  104.75:     1.79
   4.50  104.50:     1.10
   4.25  104.25:     0.46
   4.00  104.00:    -0.15
   3.75  103.75:    -0.72
   3.50  103.50:    -1.25
   3.25  103.25:    -1.74
   3.00  103.00:    -2.19
   2.75  102.75:    -2.60
   2.50  102.50:    -2.98
   2.25  102.25:    -3.31
   2.00  102.00:    -3.61
   1.75  101.75:    -3.87
   1.50  101.50:    -4.08
   1.25  101.25:    -4.26
   1.00  101.00:    -4.40
   0.75  100.75:    -4.50
   0.50  100.50:    -4.56
   0.25  100.25:    -4.58
   0.00  100.00:    -4.56
  -0.25   99.75:    -4.50
  -0.50   99.50:    -4.40
  -0.75   99.25:    -4.26
  -1.00   99.00:    -4.08
  -1.25   98.75:    -3.86
  -1.50   98.50:    -3.60
  -1.75   98.25:    -3.30
  -2.00   98.00:    -2.95
  -2.25   97.75:    -2.57
  -2.50   97.50:    -2.15
  -2.75   97.25:    -1.68
  -3.00   97.00:    -1.17
  -3.25   96.75:    -0.63
  -3.50   96.50:    -0.04
  -3.75   96.25:     0.59
  -4.00   96.00:     1.27
  -4.25   95.75:     1.98
  -4.50   95.50:     2.74
  -4.75   95.25:     3.54
  -5.00   95.00:     4.38
  -5.25   94.75:     5.27
  -5.50   94.50:     6.19
  -5.75   94.25:     7.16
  -6.00   94.00:     8.18
  -6.25   93.75:     9.24
  -6.50   93.50:    10.34
  -6.75   93.25:    11.48
  -7.00   93.00:    12.67
  -7.25   92.75:    13.90
  -7.50   92.50:    15.18
  -7.75   92.25:    16.51
  -8.00   92.00:    17.87
  -8.25   91.75:    19.29
  -8.50   91.50:    20.74
  -8.75   91.25:    22.25
  -9.00   91.00:    23.80
  -9.25   90.75:    25.39
  -9.50   90.50:    27.04
  -9.75   90.25:    28.73
 -10.00   90.00:    30.46

I personally wouldn't trade 60% vola/IV