Quote from MDCigan:
Riskarb,
Just a question, not meant in a negative way, but isn't this type of trade that is the proverbial stepping in front of freight trains to pick up nickels?
Everything I've read and studied on options trading (just finished Baird's Option Market Making) plus my own LIMITED experience suggest positions with unlimited risk should always be avoided.
This would seem to be the type of trade where you make decent money 8-9 times out of 10 and the 1 time the stock gaps up or down big on the earnings number it wipes out the 8-9 times you made money and even some more possibly.
I guess I am just not seeing the overall positive expectancy here or a compelling risk/reward although I could be missing something.
If the the trade thesis is primarily that EBAY will remain rangebound after earnings and also to pick up some time decay then it seems to me that hedging the short straddle with a long strangle would be superior because it eliminates the unlimited risk aspect.
Now from your original post, I recall the thesis is primarily that IV will come in a few points. Are there not much better plays to isolate being purely short vega then short straddles or am I missing something here? Although you mentioned avoiding it, I do not understand why a short calendar would not be much better or even some type of delta neutral ratio spread.
Just asking questions to try and learn.
There's no better method of isolating "pure vega" as you put it, conversely, the short straddle is the one option position most maligned for it's razor-thin margin of error. IOW, no opsition will earn as much in vega per 100bp on the volty-line.
If you're long a straddle, your risk is truly limited, although can be catastrophic if traded too large in contract-terms. Your small margin of error is expressed in decay, which marks-down your volty-line daily. You can attempt to neutralize your bleeding by gamma-trading your position in stock.
A short straddle has a large prob. of profit, as 777 pointed out, but lacks in the "margin of error" dept. due to the asymmetry of returns under the entire P&L distribution.
So the (short straddle) position is a pure tradeoff, prob. of profit for risk.
My practical risk relates to a gap before earnings, below/above my pre-release stops($61.20 - $68.80) or a gap related to earnings, in which it would be unlikely I would have the opportunity to offset or gamma hedge my delta position after the release.
It's essentially a bet that spot-volty will stay within a $7.60 range -- centered on the strike price, $65.00
In answer to your question -- it is akin to picking up $.05 in front of a bulldozer.
Best,
arb.
Well SAID!!!
by riskarb ( see Jame's "The S&P looks very toppy" thread moved to chitchat), he then comes back under the Maverick74 handle continuously bs criticizing riskarb 
What a joke