Pre-earnings straddle/strangle

NoDoji

NoDoji

There are some stocks that have major moves following almost every earnings call (BIDU is a prime example). I'd appreciate some input from anyone who plays these high flyers pre-earnings via straddle/strangle.

Do these plays generally work out pretty well?

Are there any particular entry strategies you recommend?
 
Quote from NoDoji:
----stocks that have major moves following almost every earnings call....
----play these high flyers pre-earnings via straddle/strangle.
----Do these plays generally work out pretty well?
More...
1) You may be better off focusing on the build-up and collapse of the option's implied volatility in the stock before and after the report.
2) Straddles/strangles would tend to best reflect the volatility movement.
3) You would want to be "careful" in carrying a position that has any type of unlimited risk through the earnings report so as to avoid what happened with GOOG in April-2008. :eek:
 
With stocks like BIDU, pre EA IV usually expands significantly and ATM money straddles don't perform anywhere near as well as you expect due to the double sided IV crush. For example, in February it moved 47 pts and the straddle made less than 10 pts. Apr was a better story since the move was nearly 90 pts. But realistically, how often is that going to occur?

IMO, you're better off with some sort of double sided spread where you take in some expensive premium to offset your over payment. What exactly that spread would be would depend on directional bias (vs neutrality), R/R, IV level, skew, etc.
 
Whatever you do I would do something which is long cheap gamma, as theta neutral as possible, short vol, and flat delta ATM.
 
Quote from NoDoji:

There are some stocks that have major moves following almost every earnings call (BIDU is a prime example). I'd appreciate some input from anyone who plays these high flyers pre-earnings via straddle/strangle.

Do these plays generally work out pretty well?

Are there any particular entry strategies you recommend?
More...


This is how we trade earnings on the floor. Though we generally stay away from BIDU, GOOG, etc.

http://livevol.blogspot.com/2010/04/fdo.html

I used FDO as a case study but get pretty general half way through. I hope this helps.
 
Quote from livevol_ophir:

So - what's the point?... There are pro-traders on this floor that only trade earnings. They find companies which have significant odds of being either a sale or a purchase - they play that one day game, and make millions a year. As you see, you're looking at 40% - 90% one day changes in FDO. Of course, if you do it badly, you're out of cash and broke really fast.
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So what you're saying is that the really smart ones (or lucky guessers) who get the direction right make milliuons and the others lose their shirts. Have you got anything for the rest of us who just want to make something on the vol collapse, regardless of price direction? :)
 
Quote from spindr0:

So what you're saying is that the really smart ones (or lucky guessers) who get the direction right make milliuons and the others lose their shirts. Have you got anything for the rest of us who just want to make something on the vol collapse, regardless of price direction? :)
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What I was saying is that these guys don't do any direction bets. They find the ones that tend (overwhelmingly) to be front spreads (i.e. sales). Direction neutral, short vega. There are a bunch, but it takes a while to find 'em.

Successful option traders tend to have very similar PnL trends. Make money most days small (ish) and then every once in a while a biggish loser.
 
Quote from Stoxtrader:

Options newbie here :D Any take on DNDN? Front spread = more options sold than bought. So...

Sell Nov 2010 $36.00 call for $6.35 ?
http://finance.yahoo.com/q/op?s=DNDN&m=2010-11

Buy Aug 2010 $36.00 put for $4.45 ?
http://finance.yahoo.com/q/op?s=DNDN&m=2010-08

$1.90 profit? :p Disclaimer: Neither buy nor sell DNDN options. I have no idea what I'm doing. DNDN should be fun to watch though.
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Not a profit. They're short calls, so if the stock rips, they lose. Lots of other ways to lose here too, but that's an easy one. It's just a bearish position.
 
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