I tried my first 'earning' spread with AMGN, having earning comming out after market close today. First leg, bot Aug P 70 @ 2.25 this morning when AMGN was trading arount 69.90 Second leg, bot Aug C 70 @ 1.90 recently when AMGN was arount 60.49 According to my calculation (Hoadley spreadsheet), AMGN has to move up or down by around 3.5% (if volatility remains same)for me to make a profit. Only one contract bot for each leg. Any comments ? Cheers !!
To be honest I didn't check the math, but I can tell you to be prepared for vol to get killed tomorrow if the earnings come in as expected. The MMs jack up vol because they do not want to get caught short vol going into earnings (they also know the public is more willing to buy options than sell them before big news so they bid higher and offer higher), and at 8:30 CST when the market opens, assuming the earnings are in-line with expectations, expect vol to get crushed. Good thing you were just testing this out with a 1-lot, and please do not think of this reply as bashing, but unless you are looking at the charts and have reason to think that the stock will move enough to break even on the cost of your straddle, you won't win at this game. First, trading vol against the MMs off the floor puts you at a severe disadvantage because among other things they have access to the information of paper flow--what the big players are doing, and second you won't be able to win because of the bid/ask spread--although tomorrow you will get a better price enterring your order as a spread (you're long 1 straddle) than if you try and leg out of this position, and third MMs will always drop vol severely after the news it out. Hope this helps, and hope you make some cash too !!!!!!!! Vega
Just looking at the way you legged in, and it looks like you bought the put for 2.25 with the stock at 69.90--so that option had .10 of intrinsic value--you essentially paid 2.15 over that value--this difference can be associated to the amount of VOL in the option. Then with the stock at 70.49, you bought the call for 1.90--roughly 1.40 over parity--so I can only assume that you have seen how much MMs can change vol even on a small move (69.90>>70.49), just be careful playing options around earnings, the MMs like to save their best tricks for then--I should know, I used to be one-hahahha Vega
Vega, Thx for commenting. Of course you are not bashing . Constructive comment are welcome, that's how I learn. Earning came out and it's 3 cents better than expected... wonder if this will jolt anything. p.s. : I tried this because I saw what happened to MMM's earning earlier in the week. "...I should know, I used to be one-hahahha..." LOL Cheers!!
The reason I said earlier to try and exit using a spread (sell one straddle) is that generally--and especially on smaller orders--MMs will give a better price on the straddle than if you try and leg it. Of course if you're kind of using the straddle to trade the stock--(i.e. you think the stock is going lower so you sell the call and hole the put, or vice versa) then this would not be the right play, but if you just want to get out of this position in the morning selling your straddle will get you better prices than if you just sell the call and put with individual orders placed at the same time. Vega
Vega, Just FYI... AMGN having good earning last nite, I was bullish. AMGN was up before open, and began to go down @ open. I figured that the MM are pulling the stock down before buying... so I sold my put around 9:45AM @ 2.20 when AMGN was around 69.50... little did I know .. AMGN tanked further.... I managed to sell the call later in the day (3:30PM) @ 1.75 on bid (stock was around 69.70 . Wasted the whole day, but great lesson ! Thanks for your inputs. Cheers!!
Sound like although you had a small loss it didn't cost you too much $$$. I would assume that by about 10:30 CST that vol was headed down and would continue moving down the rest of the day, but outside of the leg you took on the stock seemed like you faired ok. Just remember MMs live and die around earnings and expiration, so be extra cautious when trading options around these events. One thing to contemplate if trying this play again is to think about buying the straddle 2-3 days before the earnings so you don't have to pay thru the nose the day b4. Obviously you have 2-3 days decay to worry about, but if you think the stock will be making a big move due to earnings or technicals, sometimes your better off getting in early and hoping that the day before earnings vol is bid (higher) and that helps cover some of the decay. Welcome to the wonderful world of options my friend, best of luck in your future trades. Vega