Another option trading strategy

You should also show how what happens to the straddle when the stock price didn't move at all from pre-earning to post-earning. That way we can see the effect of volatility crush. Does your software also shows a % of how often it happened in the past for a stock? So that way, for any investors who still wants to do the straddle play, they can select the most volatile stock to play the straddles on.

 

Trading options on stocks requires knowing how to pick stocks or predict their volatility. Once you have demonstrated an ability to do one or both of those things, you can light a fire under it with the options. Being able to use options does not make up for being unable to select stocks or predict the direction of volatility. I don't think there is anything inherent about any strategy that is wholly right or wrong. It's more a matter of checking market conditions, having preordained rules, and following them.

Based on the IV, options are mostly fairly priced. That is, if you believe the underlying IV, options generally don't have a much of a positive (or negative) expectation. Options may have a positive expectation in your hands if you know something that tells you the IV is wrong or the price is likely to change in a specific direction.

You need not be a guru at this; all you have to do is be better than average and use consistent money management. Even identifying market conditions that indicate you should *not* trade a specific strategy may provides you with an edge by lessening the volatility of your returns. For example, I did a backtest on spreads on RUT over 30 years. The expected return is approximately zero if you take every trade without considering market conditions. However, if you simply avoid trading during certain negative general market conditions, you can make money. It requires the patience to sit on the sidelines for many months at times. You'll miss some of the best trades this way, but you'll miss the worst ones, too.

 

Sell a Diagonal Calendar..??... But I don't want your stinkin job. I'll let you fetch me coffee though ...

 

Unfortunately, I don't think you'd be smart enough to do it.
It isn't a calendar, not even close.

 

Steal $5 bucks from the trader sitting next to you, and stay out of the trade all together. Profit: $5

 

Uhm.. 15% move means 22 dollar move... so at most your straddle will be 22, bought for 15 so 7 profit.. that's $700 profit... position value at $2200, don't know where you got the 3-4k from?

You're about right on the rest.

What you need to do is estimate the IV drop following earnings. Because that will be the loss on your position.

In your case:

IV 2 days expire = 170 ($15 straddle)
IV 15 days expire = 85 ($20 straddle)

The difference between the vols gives you an estimation of what the vol will be between the two expiration dates (forward Vols), which is about 62. So your 15 day expiry IV will drop to 62, probably under... The front IV will likely drop to even lower.

This way you can estimate your loss and know what your break evens are after IV crush.

 

The only way you can control your risk is to sell before earnings on a stock you think will move alot and have a significant build in vol going into earnings

 

i found this morning NTNX failed to move and placed 3K$ on straddle expiring Sep 15. So far it lost around 50% of it is value at about total loss about 1500$.
Not sure how I can explain, whether it price was in disparity when purchase (did not seem out of whack), or another explanation I can give is big time value change (drop in the case) before and after earning call. I was expecting in the case like this, it would lose about 10-20% of it is value based on the expiration date. Not a huge disaster but disappointment neverthless. AMBA straddle placed rocked though.

 

Well, this is exactly what people tried to warn you against. IV was 92% before earnings and collapsed to 52% after earnings. The stock did not move, and straddle lost almost 50%.

You were lucky that expiration is 2 weeks way. If it was weeklies, you would lose 90%+.

Keep gambling, and it's just matter of time till your account is toast.

LEARN FIRST, TRADE LATER.

 

Regarding AMBA straddle: AMBA moved 22%. This is a biggest post-earnings move in their history. Of course straddle was a winner - but it was pure luck. As mentioned, on average, most stocks move less than expected, and straddles held through earnings are losers. Sometimes big losers.