When An Option Increases Nearly 9,000%

 
 
Fundlord said:
The stock AXLL gained over 80% on the 29th of January on some good fundamental data.

The options were trading at 0.05 on the 28th an traded as high as 4.50 on the 29th that is a 9,000%.

Could betting on a variety of stocks via options the day before earnings, drug trial announcement etc be a sustainable strategy ?

Researching the company and coming up with a thesis as to whether it has an earnings surprise or not gives you some edge plus the volume is low on most of these options so big players are not interested in buying them.

SAC has a similar strategy except they are allegedly far more certain on the earnings surprise/fda approval than the average investor.
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It can be done. An empirical study was done on straddles and strangles by Ping Zhou and John Shon which laid out the probabilities. You have to ferret out anomalies like, distorted P/E's, P/S's etc or bloated short ratios. Just something that will possibly indicate the earnings will go crazy either way.

Stocks in the 20's are said to be the best bet, but I've done ok right up to CP at $160 cdn.
The odds of going long are positive, but short's do have a slight advantage. Acknowledging that, I still only go long with the Put Synthetic Straddle (delta neutral) for earnings.
You still get your straddle, but only the put side has the greek's problems.

IMHO, maybe check it out, the "hitting it out of the park" feels nice, and done right, losses are minimal.
 
just21 said:
Tastytrade say you should be short straddles before earnings.
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One of the CNBC Fast Money traders, I think it was Dan, went short straddle before the Facebook announcement. That position got hammered.
 
syswizard said:
One of the CNBC Fast Money traders, I think it was Dan, went short straddle before the Facebook announcement. That position got hammered.
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You watch those clowns on TV talking their crap...?
It seems like they always get "hammered" with their calls/predictions/strategies...it's Hammer Time
hammer_time.jpg

(I'm like celibate to news -- I stopped following/reading it years ago. Except for the main headlines on financial news sites, I can't avoid seeing those)
 
The problem seems to be that most of the time expectations are priced in already. Only when it is highly unexpected that an option goes from a couple cents to several dollars. Obviously all the priced in options go to near zero then.

How to get around all ready priced in options ? Be first ? Bet against the herd/expectations ?
 
Fundlord said:
The problem seems to be that most of the time expectations are priced in already. Only when it is highly unexpected that an option goes from a couple cents to several dollars. Obviously all the priced in options go to near zero then.

How to get around all ready priced in options ? Be first ? Bet against the herd/expectations ?
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...That's the way the (options) market works -- it generally rewards those with foresight :); the reward is lesser when it's more evident and now.:confused:
 
I tried a 10% winning strategy with 15 R:R.
It wasn't profitable but at least I learnt that taking losses are part of the game.


HOW MANY TRADES DID YOU TAKE BEFORE GIVING UP AND DECIDING IT WAS NOT WORKING
DID YOU TEST THE SYSTEM BEFORE STARTING TO TRADE IT.
 
Fundlord said:
Could betting on a variety of stocks via options the day before earnings, drug trial announcement etc be a sustainable strategy ?
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I do a lot earnings plays as part of my event-driven strategy, but it is a lot of work (research and know the underlying as much as possible), and you have to be very selective of the stocks you want to play, and make sure they have moved in prior earnings reports. From my experience, market neutral and volatility strategies, like condors and calendars are good for capturing the vol crush (collapse in IV) after an earnings event. For directional strategies, sometimes I do bull call spread or bear put spreads, but I prefer taking long calls (90+ days out) with a collar (close to zero cost) on the front contract as a hedge; and if managed well you can end up closing all legs at a profit -- I did this on DNKN this past week.

The long straddle or strangle strategy does not work, from my experience 98%+ of the time, but who am I to disagree w/Goldman. Mostly because on very few occasions will the underlying overshoot its expected move already priced into the straddle. Short straddles or strangles work if your calls are covered and you're willing to get put the stock, this way you don't have to take losses when a leg goes against you on a big move, but this will make it an more an investment and not a trading strategy. Personally, I prefer to sell an Iron condor than have a short strangle on.

A lot of times the biggest problem is finding option liquidity on the stocks/strikes you want to play.

HTH
 
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