what type for strategy is best to use to profit on volatility?

Quote from jgold310:

Thanks for all the advice.

The stock I'm talking about is MYGN.

They will release the results of a new drug on Alzheimer's in about a month.
The stock will move a lot when the results come out, I guess that's why the volatility is high.
More...

Have you looked at the skew on MYGN? OTM calls are trading at way higher IVs than ATMs and OTM puts. Very unusual and very interesting.

Normally I'd say this indicates excessive bullishness, and that's bearish. Given the scenario though, it may mean heavy insider buying of calls which, of course, means somebody knows something - and that would be bullish.

The OTM calls are trading at exceptionally high IVs - the 75 calls closed at about 140%.

Thanks for pointing this out - it's certainly worth keeping an eye on.
 
Quote from jgold310:

Thanks for all the advice.

The stock I'm talking about is MYGN.

They will release the results of a new drug on Alzheimer's in about a month.
The stock will move a lot when the results come out, I guess that's why the volatility is high.
More...

Be careful with that one. Even with the high IV the June and July contracts have relatively low daily volume. That means that once the news is announced if you happen to be in a bad trade the volume could dry up a lot faster than you can dream of getting out of that trade.
 
How about this. Pure non-directional trade and short V.

Buy June puts and calls and sell July puts and calls. Same strike price. ( Assume news come out before June 21 )

If news come out and stock doesn't move, it likely won't move in July neither. You keep the premium difference.

If news come out and move big either way, you come out even.

If stock move in July instead of June, then you are screwed. Gotta have a downside. You can cover after news if you are nervous but that will cut your profit or make it a small loss.
 
Quote from poyayan:

How about this. Pure non-directional trade and short V.

Buy June puts and calls and sell July puts and calls. Same strike price. ( Assume news come out before June 21 )

If news come out and stock doesn't move, it likely won't move in July neither. You keep the premium difference.

If news come out and move big either way, you come out even.

If stock move in July instead of June, then you are screwed. Gotta have a downside. You can cover after news if you are nervous but that will cut your profit or make it a small loss.
More...

That trade would have a lot of downside. First using the 45 calls you would need a price movement of almost $6.00 to break even and even then you are almost at the end of your acceleration curve. Your max risk while both months are active would be about $626 per set of contracts while on the upside even with a $20 price move you are only looking at about a $257 profit per set of contracts. Second if you didn't get your move since you bought the front month the time decay on what you bought will be deteriorating a lot faster than what you sold, so you probably won't be able to sell the options due to already low volume and they will expire worthless. That will leave you with two uncovered short positions in the back month that you may have to buy back to cover. Hopefully by then IV will have dropped and that combined with the time decay won't have you losing your shirt to buy them back. The absolute best case scenario would be for the stock price to then stay in the middle of the short straddle you are now in and you won't have to cover these shorts at all.

I can hear Clint Eastwood and his famous saying: "Do you feel lucky punk, well do ya?"

---------------------------------------------

IF I were going to trade this I would go with the good old Bull Call Spread. I'd probably go with July (or maybe August in case of delays) contracts and buy the 45 strikes and sell the 65 (assuming I had the right amount of open interest and volume I like to see).

If you did this with the prices listed (assuming 1 July contract each) right now, you would have a max loss of $530, a max gain of $1470 and a break even of $50.32. Thats almost a 3 to 1 Reward/Risk ratio and a break even slightly above the current price.
 
Quote from Maverickz:
You either buy a straddle (buy a call and buy a put) which make money on a large move either direction, or you sell a straddle and keep the premium if the stock doesn't move at all. Selling a straddle is more profitable if IV is high (overpriced) and moving downward but ONLY if the stock stays in the profit range. [/B]
More...

Straddle does not have to be call and put, long call short stock is synthetic long straddle, long put long stock is a synthetic long straddle. Vise versa for short straddles. The stock does not have to have a large move in either direction in order to make the long straddle profitable, you could trade the gamma from the long straddle. Also you’re wrong in that volatility can go higher as a stock moves higher. The stock being discussed is an example since it has major news event pending volatility will move higher in to the event and the stock may do so also.

Quote from Maverickz:

It is more important in these trades to worry about the price action of the underlying and Theta (time decay) than it is to worry about Vega (volatility) [/B]
More...

Straddles by definition, whether standard or synthetic are Vega plays, so you’d be wrong in saying not to worry about Vega.

Quote from Maverickz:

The reason for this is you usually sell straddles on relatively short time frames (2-4 weeks) and since you are expecting the contracts to expire worthless the money you keep will not change no matter what happens to volatility. [/B]
More...

Since straddles are pure volatility plays you would be foolish to limit yourself to only 2 to 4 week plays if you’re looking to trade volatility. 2 to 4 weeks my be usual for some but not for the experienced options trader. The premium you originally received for the straddle should not by a long shot be confused with any money you keep until you close out that position. If you’ve sold a straddle of a duration longer then 2 to 4 weeks and implied volatility comes in there are a variety of trades you can make to lock in profits without closing that exact straddle.
 
Quote from Maverickz:



---------------------------------------------

IF I were going to trade this I would go with the good old Bull Call Spread. I'd probably go with July (or maybe August in case of delays) contracts and buy the 45 strikes and sell the 65 (assuming I had the right amount of open interest and volume I like to see).

If you did this with the prices listed (assuming 1 July contract each) right now, you would have a max loss of $530, a max gain of $1470 and a break even of $50.32. Thats almost a 3 to 1 Reward/Risk ratio and a break even slightly above the current price.
More...

I believe the original question had to do with volatility trading. Buying the call spread as you suggested is paying top dollar for some Vega and then slapping a guess on direction on top of that.

I also believe the conversation is in terms of retail trading, the OI and the volume are not going to be mitigating factors when trading 10 or fewer lots. Since you suggested a one lot what would be the right amount of OI and volume ? 2?


To the original poster, without knowing a whole lot about the particular stock you’re looking at I would suggest learning a great deal more about trading volatility before you jumped into a situation where there is such significant news pending. This event may give you an interesting opportunity to learn about some volatility trading via paper trades and other quality sources but it might not be the best time to make your first volatility trades with real money.

Good Luck

X
 
You must log in or register to reply here.
Back
Top