The secret to buying pre earnings straddles

TheBigShort said:
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???
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And if it gaps 15%+ and stays there the whole day? How does IV collapse helps you in this case?
 
Kim Klaiman said:
In most cases maybe, but one huge move can erase months of gains.

But I'm not talking about holding through earnings. The post earnings history moves are relevant because they indicate how much the options market is willing to pay for the straddle. If most previous post earnings moves exceeded 10%, it is unlikely that the straddle price will be much lower than 10% before earnings.

Now, if you are talking about selling straddle with intention to hold through earnings - this is a completely different animal. You might have an edge here as most of the time, the implied move is overpriced before earnings - but tell this to traders who sold naked straddles before last FB earnings.

I thought this whole discussion was about buying or selling straddles few days before the event and closing BEFORE the event. If the intention is to close after the event, it's a completely different game. Personally, I NEVER do it. To me, it's pure gambling.
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Selling the straddle is to capture the vol crush on the announcement. FB is a different stock/animal than DDS and M. I would not sell the straddle on FB but plenty of the stocks I scan are prime candidates.

Pure gambling? Of course not. Just like you are not magically picking random stocks to buy the straddle before earnings I am not randomly picking stocks to short vol into the event. I personally do it through calendars because the flexibility and capped risk but selling a few straddles is not exposing your whole nut if you are using the right stocks. Delta has to fight theta/vega so the real risk is how far before earnings you sell and subject yourself to pre-announcement drifts that cause you to be further away. I would do it 1-2 days before.

Macy's just proved my point. Straddle is pricing in 10% move but market open was NEVER more than 10%. M is NOT FB that gaps 8-10%. As always, pick the right stock to control risk :).
 
Kim Klaiman said:
And if it gaps 15%+ and stays there the whole day? How does IV collapse helps you in this case?
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Did Macy's gap 15% and stay there the whole day in your research? i think not. If you don't research the stock and just blindly sell straddles or do calendars then it IS gambling. Remember you said the edge comes from the hard work in researching the stock and knowing the history. M gaps 15% would be a 1 in a really bue moon situation and I would just close out and move on (you never had a bad loss on your strat?).
 
TheBigShort said:
After earnings the vol will be 40% +/- 3% with a 95% confidence interval
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Sounds a bit too optimistic for me haha, I am predicting 57-62% range but in this trades I am more conservative because if vols come in lower it is actually better so I test on the high side....

EDIT: ok went back and looked again...45-50% is not unrealistic target actually for post earnings vol...
 
El OchoCinco said:
Sounds a bit too optimistic for me haha, I am predicting 57-62% range but in this trades I am more conservative because if vols come in lower it is actually better so I test on the high side....
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haha Ill keep a look out on this trade and qoute you the vol when it opens :). Something I am noticing tho is that DDS has not confirmed earnings?
 
El OchoCinco said:
Selling the straddle is to capture the vol crush on the announcement. FB is a different stock/animal than DDS and M. I would not sell the straddle on FB but plenty of the stocks I scan are prime candidates.

:).
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Would you sell FB vol if the implied move was 10%? I think AVG over 30 earnings (if I can remember) is 6%
 
El OchoCinco said:
Correct so it is not 100% official so focusing more on M...
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hmmm it's releasing next week(estimated) usually companies would have already confirmed. I think they are going to push the date. I am going to look into this tomorrow. But Selling AUG 17 buying SEP 21 might not be a bad idea....
 
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