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How to make money on Volatility before earnings?


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  #1 (permalink)
esby06
Seattle, WA
 
Posts: 28 since Sep 2011
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Hello everyone. Im testing my strategies on increasing volatility before earnings release. But i need some professional
advice from people who is successfully making money on volatility.
I would really appreciate if anyone would share any ideas or strategies they use.

Thank you in advance.

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  #3 (permalink)
 traderwerks   is a Vendor
 
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You can buy volatility before earnings with time spreads and sell volatility right before earnings with verticals.

Math. A gateway drug to reality.
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  #4 (permalink)
esby06
Seattle, WA
 
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traderwerks View Post
You can buy volatility before earnings with time spreads and sell volatility right before earnings with verticals.

What are you mean buy with time spreads?

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  #5 (permalink)
 
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 Jura   is a Vendor
 
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esby06 View Post
What are you mean buy with time spreads?

I assume a calendar spread. For trading volatility, you could also look into a straddle or strangle.

Btw, Cohen has written two good and accessible books on option trading: options made easy and volatile markets made easy. Perhaps worth checking out.

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  #6 (permalink)
 Cloudy 
desert CA
 
Experience: Intermediate
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"Buy volatility with time spreads" - does that also mean buy at relatively lower volatility?

Time spreads are calendars.
The "front" month is the closer month. Usually an option (call or put) is sold at an underlying price.
The "back" month is usually a month later. Usually an option (corresponding call or put to front month) is bought at same underlying price.

I assume he means "sell volatility with verticals" by using iron condors.
An iron condor consists of two vertical spreads.
The two vertical spreads usually consist of:
A bear call spread (bull credit spread) on the right, and a bull put spread (bear credit spread) on the left.
And the center of the IC is near ATM.

The term "vertical" refers to the same month for both legs of a vertical spread.So slightly different prices for the component option legs of a vertical spread but both options in the same month.

Both right and left credit vertical spreads in the IC are all in the same expiration month.

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  #7 (permalink)
 Cloudy 
desert CA
 
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traderwerks View Post
You can buy volatility before earnings with time spreads and sell volatility right before earnings with verticals.

Thanks for the tip. What about in relation to option expiration if you don't mind giving an answer that is? Is there also a similar strategy for timing the placing of spreads before, at and right after option expiration?

Just remember, OP, price fluctuations can still ruin a spread position real quick. There are ways and attempts to plan for that, but it's a dangerously tricky art which I'm still trying to figure out.


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  #8 (permalink)
 traderwerks   is a Vendor
 
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It all depends on what trade you are trying to do and how far until expiration.

I remember selling a bunch of spreads before an Apple announcement, that was 10 days before expiration. When the volatility died ( Implied volatility ) after the announcement, I just had to sit on them for the week. The price moved but the IV fell so much, no one was even quoting those options any more.

Each situation is different and how it relates to the catalyst you hope happens ( or not to happen ) depending on what your trade it attempting.

I will start reading your journal.

TW

Math. A gateway drug to reality.
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  #9 (permalink)
 datahogg 
Knoxville Tennessee USA
 
Experience: Intermediate
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Trading: ES, NQ, CL, /6E futures options.
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Back to the original post for earnings announcement. Prior to the announcement you would expect the
near term option to have higher than normal IV.

The far month IV hopefully would be near normal or only slightly elevated.
There may be a difference between near term IV and far month IV. Near term a good
percentage higher.

Buying a double calendar at strikes not too far from the price should mean a good price for the
calendars.

After earnings release the IV of the near term may decline significantly, resulting in a gain in the
double calendar.

But beware, real life does not always work as theory might predict.

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  #10 (permalink)
 
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 Cogito ergo sum 
Amsterdam
 
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Alternatively, you can take a look at the ATM straddle for the front month. Take about 85% of the value of that straddle to get the implied move. Next sell an Iron Condor for a net credit with the with of a bit over the implied move to play for a volatility crush after earnings. This trade assumes that you do expect the stock to trade within the implied/ defined move of your condor.

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