Strangles and Earnings

[segv]

Quote from MTE:

A straddle/strangle is basically a bet that the realized volatility will be greater than implied, or, in other words, that the market has mispriced the straddle/strangle.

It is possible that one makes money with HV < IV, and also possible that one looses money even when HV > IV. The returns from delta hedging are path dependent; it is not enough to be correct about the relative pricing of IV/HV. On the other hand, if IV increases the accumulated profits from delta hedging can be quite substantial, assuming the trader has hedged rationally (1/2/3 daily sigma). The key to this strategy is accurate HV/IV forecasting, combined with disciplined delta hedging (no top or bottom picking or delta bias).

-segv

 

[kalikahuna]

4re

Your tips helped a lot. I tried this with BBBY and it kinda worked (approx 60% return with straddle at 37.5...its now near the 52 week low at 34)

I have a question for you and the others about proper follow up action. I didnt get a long-term option this time...but i will from now on on others.

I was reading McMillan's suggestion to roll up or roll down the straddle/strangle in order to keep some of your profit while not limiting your upside potential....however, isn't this risky as you go from making money to being down again, even though now the max loss is significantly less, you're still down....any thoughts?

 

[IV_Trader]

Quote from kalikahuna:

4re

Your tips helped a lot. I tried this with BBBY and it kinda worked (approx 60% return with straddle at 37.5...its now near the 52 week low at 34)

I have a question for you and the others about proper follow up action. I didn't get a long-term option this time...but i will from now on on others.

I was reading McMillan's suggestion to roll up or roll down the straddle/strangle in order to keep some of your profit while not limiting your upside potential....however, isn't this risky as you go from making money to being down again, even though now the max loss is significantly less, you're still down....any thoughts?

you made money on BBBY only because you was NOT delta balanced going into report. The 5.5% move did not covered collapse in June vols from 30 to 21.
Good luck

 

[4re]

Quote from kalikahuna:

4re

Your tips helped a lot. I tried this with BBBY and it kinda worked (approx 60% return with straddle at 37.5...its now near the 52 week low at 34)

I have a question for you and the others about proper follow up action. I didnt get a long-term option this time...but i will from now on on others.

I was reading McMillan's suggestion to roll up or roll down the straddle/strangle in order to keep some of your profit while not limiting your upside potential....however, isn't this risky as you go from making money to being down again, even though now the max loss is significantly less, you're still down....any thoughts?

Kalikahuna,

Since I don't know how much time you have on these contracts I'll assume they are up next month. I also don't know how long you plan on playing this particular stock. But here is something to look at anyway. I have not spent anytime really looking at the greeks so you might want to check it out first. But here is a suggestion.

1. sell all your contracts for a profit.
2. Put a another trade using the Nov 37.50 calls and 32.50 puts.

BBBY is actually getting very close to a 2 year low and it is in a down trend. If it breaks that 2 yr low could go down very nice through summer. If it keeps going lower and you can make even more profit you can re position your trade lower and keep the Nov 37.50 calls open. At that point you will have 2 levels of calls for it to go through before Nov.

I am glad to hear you made some money like this though. I think Bollinger bands are perfect for options.

4re

 

[Eliot Hosewater]

Anyone here ever try playing the volatility on rate sensitive stocks aroung Fed meeting time?

They always say anticipated Fed moves are already priced in beforehand, but I still see quite a bit of movement sometimes.