The previous short-term trading strategies mostly did not work, so this is what i am thinking. During earning season, buy soon-to-expire but not expiring like 1-2 days from now a day before earning call to minimize the buying cost. And for that, I mostly bought straddle and expect to move a lot. But if volatility is failed to materialize, then straddle will lose almost all of its value or most had I bought options expiring in 1-2 days. Since I am no insider and almost no way of telling how the tomorrow's earning can be, that part is almost a pure gamble. The market is totally unpredictable and irrational in that aspect not to mention. Instead if I stretch it few days or 1-2 weeks (somewhere around 10-20 days from now), then I notice that cost will not increase much but on the next after earning call, it doesn't decay as much as the one expiring in 1-2 days. So this seem to decrease a risk a lot yet keeping the reward high. So here is a hypothetical scenario: Company A with stock 150$ is reporing earning call, expects lot of volatility but also possible it fails to move. - buy call/put strike price 150$ expiring two days from now, total cost 15$ for total of 1500$. Now tomorrow company A reports and stock moves 15% up/down and I reap the gain of ~150-200% and sold for ~3000$-4000$. (call is now 300$ and put is now worthless or vice versa). or Company stock fails to move significantly (3-4%) and both calls and puts are almost worthless because it completely decayed and i recovered about 10% by selling both call/put at 150$ Now changing to strategy: - buy same strike priced 150$ straddle but now expiring about 15 days from now on. From looking at several options, difference in price between 15 days or 2 days from now was not that much actually (surprised), it was perhaps 15-20% costlier. Lets say it costs 20$ as compared to 15$ in previous instance. Now company stock moves wildly 15-20% and now i expect to reap bit less than still sizeable: perhaps 100-150% and sell for roughly 2500-3000$ that initially costed 2000$. Now the loss case will be much better. Stock fails to move significantly and moved around (3-4%) but options will still have significant time value left and will lose about 20-30$ of its value. So I sold it for 1700$ that originally costed for 2000$. Now all these are ball park figure that I sort of came up based on mostly observation. Also, one thing I kept in mind was to compare the cost of options to actual stock price. If either call or put price is more than 10% of the stock price, then probably do not bother: i.e. if NTNX stock is 20$ and call and put each costs about 2$ (totalling 4$ for straddle), then 20$ stock has to move a lot to get even (need to move at least 20%). On the other hand, lets sat NFLX current price is 150$ and call and put each costs about 3$ then straddle will be around 6$. In that case, straddle cost is less than 5% of stock price, so the stock needs to move much less than the NTNX to get even. -
You will lose on this strat. Imagine if you take a negative cost basis upfront, and you're still profitable. If you can figure that out, I have a job for you in Texas.
Statistical probability. If you cannot ascertain a mathematically plausible reason to expect a positive return over a set time or number of trades, there is no rationalizing your risk. This is akin to gambling.
You can't expect to make money doing this randomly. You have to have the expectation that those options are underpriced for the expected move. That expectation needs to come from a reliable process. Not easy.
Rob, you know better. As a matter of fact, you're one of two that I'd take the time out and talk to. When will you or the firm sponsor traders? I'm interested in a co-partnership.
Lightspeed does not sponsor traders or have a prop firm. I don't expect that to change. We are investing in technology to provide more choice of software. Bob
Holding straddles through earnings is on average a losing proposition. You might have few occasional winners if the stock moves more than expected, but in most cases volatility crash will kill the trade. We implement similar strategy but always sell before earnings. The straddle will make money from IV increase or gamma (stock move), sometimes from both. Read more: How We Trade Straddle Option Strategy Buying Premium Prior To Earnings - Does It Work? Why We Sell Our Straddles Before Earnings
I stopped reading as soon as you failed to mention implied volatility in buying a straddle. if you don't know what implied volatility is, its run up to earnings and collapse afterwards then stop trading and start reading.