Strangles & Straddles
- Thread starter RainMaker3000
- Start date
Don't take this the wrong way but you are going to get hosed on that strangle. You never buy a straddle or a strangle right before earnings, you sell them. The most profitable strategy on the floor is to run up the vol in the days before an earnings report and then tank it the morning they report. Vol always sells off after the news, runs up before the news, a lot like the stock price. You are going to get killed. Look at the volatility on GE the last 2 weeks. They ran it up 20 pts! That is huge! Watch the vol come in at least 5 if not 10 pts after GE reports their earnings. You just commited the cardinal sin in option trading. I bet those guys on the floor want your phone number because they will sell you that strangle as many times as you want. Someone on ET had a really good quote about options. They said, "Options is all about laying off the risk to the dumbest guy in the room." Hey let everyone know how that trade turns out for you.
I would not ignore what this man is saying
i use only about 2% of my capital , if its a good report i go long on the shares also, in my book its a good play , your IV play is not bad, but what if the stock gaps down or up what the hell do you do when your short on the strangle... you would lose your shirt and more.... if your long the strangle your only losing the premium
we'll have to wait and see
we'll have to wait and see
Originally posted by RainMaker3000
i use only about 2% of my capital , if its a good report i go long on the shares also, in my book its a good play , your IV play is not bad, but what if the stock gaps down or up what the hell do you do when your short on the strangle... you would lose your shirt and more.... if your long the strangle your only losing the premium
we'll have to wait and see
OK, let me help you out here. First of all, the play here to do is nothing. If you are a market maker you sell the strangle because that is what you have to do when you make markets. They know this and they are not stupid. So what they do, is they juice the premiums through the roof and sell as much of it as they can and then when GE reports they tank the premium and buy back all that volatility at a fraction of where they sold it. Now me personally, I look at GE and say there is nothing to do, I wouldn't sell the strangle because I don't like negative gamma. I wouldn't buy it either because they premium on those calls and puts you bought were insane. I looked again and they are twice as high as they should be. You paid around 80 and they should be at 40. And the market makers really don't have much to lose either. Lets say GE does report and lets say it gaps up or down 2 dollars which for GE at this level is a big move. They still will do very well. They will tank the volatility and let the options they sold to you go to 0. Now when you say something to the effect that all you can lose is your premium, what does that mean. You are going to lose 100% of your investment. Whatever you paid for that strangle is going to be worth close to 0 soon. So yeah, you will lose the premium. Hell, the Enron shareholders didn't even lose that much. The point I am trying to make here is that there are thousands of stocks out there and a handful of good plays. This is not one of them. In fact you couldn't have picked a worse play due to the extreme runup in volatility. But like I said before, inform the board of the results of this trade. If one person on here learns not to make the same mistake you did then I guess they owe you a beer. Thank god you only put 2% of your capital into this trade.
def
Sponsor
There is no fixed number. depends on the stock, the market, the environment, historical vol, time to expiration, etc. For the GE example, go back and check historic implied vol a few days before and after earnings for a number of earnings periods. From there you can make a judegement call.
Originally posted by stock777
Only 1800%?
Why even bother.
Let's see, that means GE has to run to about 34 a share from 27 in a week. Does GE ever do that? More likely it goes to 30/30.50 or so up till expire if there's good news. That's what the options are saying anyhow.
That's only a $70,000,000,000 in market cap change in a week for GE.
Ahh, I DON'T think so.
nitro
Listen Son,
What you should really keep in mind is that for the previous 5 quarters GE has had 0% deviation from street expectations. Q1 Actual 35 street .35 deviation 0%
Q4 Actual .39 street .39 deviation 0%
Q3 Actual .33 street .33 deviation 0%
Q2 Actual .39 Street .39 deviation 0%
So where are you getting the idea that GE is going to move when the earnings are released? Listen to Maverick, when the earnings are released implied volatilty will get dumped faster than one of Liz Taylor's husbands. Look at an IV chart. ST vol's are 20% higher than average. The only reason you have made any money on this position at all is that you happen to have been long option premium when the market tanked. But, trying to buy straddles before earnings and sell after earnings is a recipe for a losing trade. Even the blue hairs in my investment club know that. You got lucky this time.
Louise
What you should really keep in mind is that for the previous 5 quarters GE has had 0% deviation from street expectations. Q1 Actual 35 street .35 deviation 0%
Q4 Actual .39 street .39 deviation 0%
Q3 Actual .33 street .33 deviation 0%
Q2 Actual .39 Street .39 deviation 0%
So where are you getting the idea that GE is going to move when the earnings are released? Listen to Maverick, when the earnings are released implied volatilty will get dumped faster than one of Liz Taylor's husbands. Look at an IV chart. ST vol's are 20% higher than average. The only reason you have made any money on this position at all is that you happen to have been long option premium when the market tanked. But, trying to buy straddles before earnings and sell after earnings is a recipe for a losing trade. Even the blue hairs in my investment club know that. You got lucky this time.
Louise