The secret to buying pre earnings straddles

[TheBigShort]

MACY'S (M)
DIllard's (DDS)

Big front vol spike

MACY (M). Reporting Aug 15 after earnings. This is the morning of the 4th bus day. I use bus days in my calcs not calendar.

Aug 17 100% MONEYNESS has a straddle price of 4.05(mid) and a vol of 81.21%
Aug 24 100% MONEYNESS has a straddle price of 4.24(mid) and a vol of 62.79%

We can use this to find what move the option market is implying as well as the ambient volatility (volatility over the next 3 business days).

The ambient vol = 27.5%
The event vol = 187.11%
This means the implied event move will be .09404% or 40.56 * .094 = +/-3.812.

Now If we look at macys historical 5 day vol we have lows of 11% and highs of 65% with the 30 day average being 29%. So the ambient vol seems fairly priced. Now we have to see if the earnings event is fairly priced(against past earnings) or if it will rise in the next three business days due to some uncertainty etc... I am not at the terminal right now so I can not see the average absolute move for MACY but I would imagine this is over priced. So selling a straddle tomorrow might be an excellent idea. Im kind of pissed I wrote this tho. Kim is just going to repackage this and sell it to his clients for 2500.

 

[TheBigShort]

You could also go long a calendar here as well, would be a similar effect

 

[destriero]

100% cereal.

MACY (M). Reporting Aug 15 after earnings. This is the morning of the 4th bus day. I use bus days in my calcs not calendar.

Aug 17 100% MONEYNESS has a straddle price of 4.05(mid) and a vol of 81.21%
Aug 24 100% MONEYNESS has a straddle price of 4.24(mid) and a vol of 62.79%

We can use this to find what move the option market is implying as well as the ambient volatility (volatility over the next 3 business days).

The ambient vol = 27.5%
The event vol = 187.11%
This means the implied event move will be .09404% or 40.56 * .094 = +/-3.812.

Now If we look at macys historical 5 day vol we have lows of 11% and highs of 65% with the 30 day average being 29%. So the ambient vol seems fairly priced. Now we have to see if the earnings event is fairly priced(against past earnings) or if it will rise in the next three business days due to some uncertainty etc... I am not at the terminal right now so I can not see the average absolute move for MACY but I would imagine this is over priced. So selling a straddle tomorrow might be an excellent idea. Im kind of pissed I wrote this tho. Kim is just going to repackage this and sell it to his clients for 2500.

Where models fail.

 

[TheBigShort]

Where models fail.

LOL Des don't try to make it seem like you are not a models guy yourself!!

 

[Kim Klaiman]

MACY (M). Reporting Aug 15 after earnings. This is the morning of the 4th bus day. I use bus days in my calcs not calendar.

Aug 17 100% MONEYNESS has a straddle price of 4.05(mid) and a vol of 81.21%
Aug 24 100% MONEYNESS has a straddle price of 4.24(mid) and a vol of 62.79%

We can use this to find what move the option market is implying as well as the ambient volatility (volatility over the next 3 business days).

The ambient vol = 27.5%
The event vol = 187.11%
This means the implied event move will be .09404% or 40.56 * .094 = +/-3.812.

Now If we look at macys historical 5 day vol we have lows of 11% and highs of 65% with the 30 day average being 29%. So the ambient vol seems fairly priced. Now we have to see if the earnings event is fairly priced(against past earnings) or if it will rise in the next three business days due to some uncertainty etc... I am not at the terminal right now so I can not see the average absolute move for MACY but I would imagine this is over priced. So selling a straddle tomorrow might be an excellent idea. Im kind of pissed I wrote this tho. Kim is just going to repackage this and sell it to his clients for 2500.

Let me make it simple for you:

The straddle price right now implies 10% move. Here is the history of the last 5 cycles moves:

As you can see, max intraday move was higher than 10% in each one of the 5 last cycles.

You don't need all the complicated math to see that the straddle price is not going much lower than 10%.

That said, I would not buy a straddle on M because it is a high IV stock and backtesting doesn't show great results. But I wouldn't sell it either. Why? Simple: selling the straddle for $4 would require around $800 in margin. Best case scenario - straddle price goes down to maybe 3.50-3.60, and you made $40-50, a whopping 5% return on margin, while risking much more if IV does increase much (to compensate for the risk), or the stock moves big time.

 

[TheBigShort]

Let me make it simple for you:

The straddle price right now implies 10% move. Here is the history of the last 5 cycles moves:

View attachment 189653

As you can see, max intraday move was higher than 10% in each one of the 5 last cycles.

You don't need all the complicated math to see that the straddle price is not going much lower than 10%.

That said, I would not buy a straddle on M because it is a high IV stock and backtesting doesn't show great results. But I wouldn't sell it either. Why? Simple: selling the straddle for $4 would require around $800 in margin. Best case scenario - straddle price goes down to maybe 3.50-3.60, and you made $40-50, a whopping 5% return on margin, while risking much more if IV does increase much (to compensate for the risk), or the stock moves big time.

Just looking at implied move is not very helpful tho. For example you could have MACY'S showing an implied move of 6% and you might be tempted to buy it hoping for a ramp into earnings. BUT a second look at the WHOLE picture and you notice the ambient vol is 50%. Then I would almost always be selling this to extract the over priced ambient vol and switch it to a long straddle right before earnings IF 6% move was still implied.

 

[El OchoCinco]

Let me make it simple for you:

The straddle price right now implies 10% move. Here is the history of the last 5 cycles moves:

View attachment 189653

As you can see, max intraday move was higher than 10% in each one of the 5 last cycles.

You don't need all the complicated math to see that the straddle price is not going much lower than 10%.

That said, I would not buy a straddle on M because it is a high IV stock and backtesting doesn't show great results. But I wouldn't sell it either. Why? Simple: selling the straddle for $4 would require around $800 in margin. Best case scenario - straddle price goes down to maybe 3.50-3.60, and you made $40-50, a whopping 5% return on margin, while risking much more if IV does increase much (to compensate for the risk), or the stock moves big time.

This is wrong because why would you sit there and hold the straddle post earnings an ENTIRE TRADING DAY after the vol crush? POST EARNINGS open proves that the shorting the straddle that implies a 10% move is a winner in most cases....

 

[El OchoCinco]

Selling M Aug 17th $40.50 Straddle @ $4.03 is one way to play this. IV 79%.

 

[TheBigShort]

This is wrong because why would you sit there and hold the straddle post earnings an ENTIRE TRADING DAY after the vol crush? POST EARNINGS open proves that the shorting the straddle that implies a 10% move is a winner in most cases....

hmm, this has me thinking. Lets say MACY opens up 2% higher. But it has an average move of 10% during the day........all the event vol is gone by 10 am. Buy the straddle???

 

[El OchoCinco]

There is your straddle earnings right there baby:

Who cares where M was at the end of the post report trading day. That bitch opens and the vol gets sucked out and place the order to cover at decent profit.