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How to make money on Volatility before earnings?


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  #11 (permalink)
 traderwerks   is a Vendor
 
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datahogg View Post
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.

Hmm.. Have you actually traded this, because it does not look like it would work with calendars.

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  #12 (permalink)
 
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 lrfsdad 
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traderwerks View Post
Hmm.. Have you actually traded this, because it does not look like it would work with calendars.

I started a similar thread here:

I have screen shots of the options before and after earnings as well as a chart showing the vol crush, so you can research a few scenarios if you like.

I've been toying with IC's on options with high implied over historical (usually this is before earnings) anyway 3 of the 4 spreads worked out, with the last in AKAM being a loss

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  #13 (permalink)
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lrfsdad View Post
I started a similar thread here:

I have screen shots of the options before and after earnings as well as a chart showing the vol crush, so you can research a few scenarios if you like.

I've been toying with IC's on options with high implied over historical (usually this is before earnings) anyway 3 of the 4 spreads worked out, with the last in AKAM being a loss

I meant with calendars, not an IC.

I am quite familiar with vol crush.

Anyway, I will leave this thread alone.

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  #14 (permalink)
 
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datahogg View Post
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.

Going into ER, all options increase in IV. The front month increases slightly more, but I have never heard of a discrepancy where this tactic would work, usually it is minimal at best.

With Calendars, you want to put them on when Implied volatility is low. The more extrinsic value, the greater the option reaction to changes in vega.

The short option can lose 1/2 of its premium while the long option might only lose 2/5s but since you paid more for the long term back month option, it is going to hurt your pocket more. A double calendar doesn't hedge against this because you have two long options that are still primarily composed of premium, just one is a put and one is a call.

Before E.R.
May 2013 - 1
June 2013 - 4
Total amount invested: 3


After E.R.
May 2013 - 0.5
June 2013 - 2.5
Total amount remaining: 2

If price doesn't even move, you will lose money. In order to be profitable you need to be directionally right, AND you need the price move to exceed the time decay.

Here are some potential trades to go into an ER.
- Buy a long straddle/strangle if you expect a big move. Don't buy it the day before the E.R. when everyone else does or else you will be paying a premium.
- Buy call/put going into the ER and sell it @ the close prior to E.R. Everything else remaining equal, the option will be worth more going into the E.R. because IV will have increased the value of the option

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  #15 (permalink)
Greg Loehr
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Buying straddles/strangles heading into an earnings announcement can be tough. Even though it looks like the straddle will profit from the increased vol, it's also decreasing from theta. You might make money if the stock moves, but that's coming from movement and not volatility, which was the topic of this thread.

As for calendars, you need to look at each month individually and see how much each leg of the calendar profits/loses as the implied vol returns to 'normal' levels after the announcement. Sometimes the skew between the months is excessive enough to make one comfortable with the amount of stock movement needed to make the calendar a loser after the announcement.

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  #16 (permalink)
Greg Loehr
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Here's an idea for AAPL earnings today after the close:

Buy Aug2 425 calls,
Sell Aug1 425 calls,
As a long calendar spread for a debit of $0.65.

Should be "safe" in about a 30-point range.

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  #17 (permalink)
Greg Loehr
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Here's another one. Not the best example, but something to watch for a "vol" trade.

Buying to open the GD Aug 82.50-85 strangle for about $2.50'ish. Subject to about a $0.64 vol crush, which is 25% of the trade. Needs about a $2.50 move to breakeven tomorrow, based on my assumption of the vol going to 17.

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  #18 (permalink)
 
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Another option is an in the money strangle. For starters there's a higher probability of being profitable

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  #19 (permalink)
 
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Greg Loehr View Post
Here's an idea for AAPL earnings today after the close:

Buy Aug2 425 calls,
Sell Aug1 425 calls,
As a long calendar spread for a debit of $0.65.

Should be "safe" in about a 30-point range.

I am trying to get some Diagonal backspreads in my life but they chew up so much margin

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  #20 (permalink)
Greg Loehr
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Bermudan Option View Post
Another option is an in the money strangle. For starters there's a higher probability of being profitable

By ITM, do you mean one option or both options ITM? Not sure how that increases the chances of profit.

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Last Updated on July 28, 2013


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