The secret to buying pre earnings straddles

[El OchoCinco]

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???

You have no idea what will happen a few days after earnings, all the play is the vol crush. For me it is the vol skew so I play the ATM calendar in this case, $40.50 calendar is like $0.14.

But if you short the straddle, you get out after the open when the vol crush and the market is fighting over the news/direction and theta keeps helping. Stock could churn or run, but I would be out.

 

[Kim Klaiman]

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.

Things are related. In your example, you won't find a straddle pricing 6% move with ambient vol of 50%. It just won't happen. This is why for me, it is much easier to look at the straddle price and compare it to previous cycles prices and previous cycles post earnings moves.

IV will ALWAYS increase before earnings - but this is not what really matters. The only thing that matters is the straddle price and the straddle price chart because it shows you 1) if the straddle price is cheap and 2) if the straddle price keep its value well (meaning it is offsetting the negative theta).

Each stock is different. For some stocks straddle price keep value well - this is where we go long. For others, not so much - this is where we short the front month (with calendar, not short straddle).

 

[El OchoCinco]

Macy's announce BEFORE market on 8/15. Even better as you can cover at the open and not wait overnight for light volume post market stock swings.

 

[destriero]

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.

Wut? Bet-case scenario? Dude, your comments are amateurish.

 

[mushinseeker]

Can someone check these returns please. I am not getting why the May 16,2018 post earnings open is 6.78%. If it closes 29.63 pre-earnings and it open next day at 31.96.. (31.96-29.63)/(29.63)= 7.8%. What did i miss?

 

[TheBigShort]

Macy's announce BEFORE market on 8/15. Even better as you can cover at the open and not wait overnight for light volume post market stock swings.

Yea, I think the play here is short the straddle into earnings. Cover in the morning and add along straddle (if gap is small).

 

[El OchoCinco]

Well that second part is out of my pay grade because I think that is more just a coin toss guess. I don't know where the stock is going in the next few weeks, I just want to play the vol crush .

 

[El OchoCinco]

DDS August 17th ATM straddle @ $9.50 possibly (wider b/a) and vols are 88%.

THose vols should come down to 70% after earnings...

 

[Kim Klaiman]

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....

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.

 

[TheBigShort]

DDS August 17th ATM straddle @ $9.50 possibly (wider b/a) and vols are 88%.

Those vols should come down to 70% after earnings...

Well we can actually solve for what it would be after earnings. (This would be assuming a normal ie.NOT facebook earnings). Give me a second and I will let you know.