Trading the Volatility Smile on Earnings

Atikon said:
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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How does it take care of gamma and delta risk? You're risk is proportional to your moneyness (when choosing strikes). No CFD provider is going to guarantee a fill when it blows through your limit on the hedge. How long have you been doing this?

And the smile is nonexistent in reporting season. Even if you can find edge on skew... the overwhelming risk will be gamma/dgamma.
 
PoopyDeek said:
How does it take care of gamma and delta risk? You're risk is proportional to your moneyness (when choosing strikes). No CFD provider is going to guarantee a fill when it blows through your limit on the hedge. How long have you been doing this?

And the smile is nonexistent in reporting season. Even if you can find edge on skew... the overwhelming risk will be gamma/dgamma.
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That what the CFD is for, you don't think ppl will sell at 2 Stdv out? With IG Markets for 4 years now/Options Trading for 1 Year.
 
Atikon said:
That what the CFD is for, you don't think ppl will sell at 2 Stdv out? With IG Markets for 4 years now/Options Trading for 1 Year.
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I don't know what you mean. You're going to hedge into the direction of your risk after earnings? After it opens past one of your wings?

If you need to hedge, you can't...

Say you're short $1,200 notional premium and the shares gap $30. You're in for a $1,200 credit and the shares have moved $3K. Doesn't sound like a recipe for success.
 
PoopyDeek said:
I don't know what you mean. You're going to hedge into the direction of your risk after earnings? After it opens past one of your wings?
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No I'm going to put in an order for Pre/Aftermarket (IG offers CFD Trading in Pre and Aftermarket with CFDs on certain tickers)
 
PoopyDeek said:
The shares gap and they will guarantee a price? How?
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Have you looked at how the prices gap on Earnings, on second basis? There is a lot of buying and selling going on in between if you go a bit further out. IG has one of the fastest (compared to other CFD Broker)excecutions with 0.001 seconds. Furthermore they market that they are taking bid/asks from various Darkpools from a variety of banks.
 
There is no edge in a CFD. There is no fill if the shares gap outside one of your wings. Plus the shares will be $0.50 wide and your CFD will be a buck or two wide. You're playing roulette.
 
Atikon,FWIW, you will get pancaked at some point selling those cheap wings..Bad bet

Gun to my head,Ild ratio the shit you are selling,and only on 1 side..

At least if you get lucky,you will make some real money
 
The earnings month smile shape usually has a big hump of very high IVs around the ATM strike, with the OTM wing IVs trading much cheaper. You're better off buying those cheaper OTM wings and selling the nosebleed high ATM IVs.

At least with a "cheap" long wide butterfly, which the earnings smile allows you to buy with really good edge, your downside is limited (what you paid for the fly). And you'll make a fortune if the earnings report is a dud and the stock price remains rangebound within your OTM wing strikes.
 
VolSkewTrader said:
The earnings month smile shape usually has a big hump of very high IVs around the ATM strike, with the OTM wing IVs trading much cheaper. You're better off buying those cheaper OTM wings and selling the nosebleed high ATM IVs.

At least with a "cheap" long wide butterfly, which the earnings smile allows you to buy with really good edge, your downside is limited (what you paid for the fly). And you'll make a fortune if the earnings report is a dud and the stock price remains rangebound within your OTM wing strikes.
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My experience has been that you need some selection alpha on picking which names to sell in order to profit over wing costs in the long-run if you want to buy flies. OTOH, selling the straddle or wings blindly should net slightly positive over time but as was already mentioned, it’s not a very efficient use of capital from sizing constraints, not to mention the PnL distribution is unpleasant. All in all I was surprised after doing this a while that there isn’t more edge on the short side for the risk being taken.
 
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