Trading the Volatility Smile on Earnings

Atikon

Atikon

Hey Guys,

are any of you trading Volatility Smiles/IV Crush around Earnings? I was thinking of doing during this Earnings Season because who really knows what is priced in at this point.

I would be selling a Call and a Put (far OTM to eliminate Gamma Risk) at the same delta (Takes care of Delta Risk). I thought maybe put in a buy/sell via CFD if the stocks moves after hours/pre market in the Direction where Gamma would affect my Call/Put.
 
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You have a ton of speed risk here. You might think you have no delta risk but that will change very quickly.

It is true that the teenies around earnings are quite expensive, but you wont get a high return on capital with them. If you go to big and a 5 sigma move occurs (which they do) you will be destroyed.

I don't want to stop you from doing it, but keep in mind, you will blow up if you go to big and will have a low ROC if you size properly.
 
You are gambling on a binary event...win or lose big. The high IVs are tempting, but like TheBigShort mentions you have price gap risk on those short OTM wings. The gamma and vega risks accelerate (2nd and 3rd order greek risk) when the stock price rapidly approaches those for OTM shorts.

I would recommend looking back at previous post-earnings price behavior to get some idea how an individual stock moves on earnings surprise/disappointments, or just back test your strangle idea during past earnings announcements.
 
Don't like selling strangles into earnings..Would much rather trade calenders/diagnols assuming spot vol is really jacked..

I need to know there is a limit to my pain..
 
I by far think the most important variable is which equity you choose... Keeping a decent expected value over x years using this strategy imo is all about sizing correctly and keeping ROC high by choosing aggressive spreads/strikes to overcome the massive losses you will eventually take. Also, I would buy the wings, and not necessarily the cheapest wings either. I have been doing only earnings condors for a couple years, and even though you are short volatility and such wings will be expensive, they can cut margin by 10-20x, and makes ROC as @TheBigShort says, much better. Which equities are you thinking about?
 
10 x 20 x???

I was trading TSLA on Friday,got bored and did the 800 840 1 x 3 call ratio 20x. Stock trading at 760,options expiring the same day..

My buying power went from 220k to minus 450k in a nonosecond.They shut me down.Checked my Deltas to see if. Put in a trade backwards.Then checked individual margins.Within nanoseconds I bought 40 of the 900 call at .04 ,bringing my buying power to 200k.

Moral of the story is check to see what percent up down move your broker simulates in calculating margin.For TSLA it was a 50 percent move.For AAPL,it's 30 percent.

And fuck yeah,get long those wings pre earnings:)






lightfightercap said:
I by far think the most important variable is which equity you choose... Keeping a decent expected value over x years using this strategy imo is all about sizing correctly and keeping ROC high by choosing aggressive spreads/strikes to overcome the massive losses you will eventually take. Also, I would buy the wings, and not necessarily the cheapest wings either. I have been doing only earnings condors for a couple years, and even though you are short volatility and such wings will be expensive, they can cut margin by 10-20x, and makes ROC as @TheBigShort says, much better. Which equities are you thinking about?
More...
 
@taowave The margin for a TSLA strangle right now with strikes at 700 and 800 is 14k, while the iron condor is 500, $5.00 wide. ~97% less margin, much better ROI. I have found the significantly better ROI is worth the huge reduction in premium over time... so far :)
 
Are you trading with Portfolio margin?


lightfightercap said:
@taowave The margin for a TSLA strangle right now with strikes at 700 and 800 is 14k, while the iron condor is 500, $5.00 wide. ~97% less margin, much better ROI. I have found the significantly better ROI is worth the huge reduction in premium over time... so far :)
More...
 
Interesting..I trade thru TOS..Just switched to portfolio margin,which is an alternative "margin" to Reg T,which it appears your margin is
 
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