There's not all that much to know imo about options and earnings. Now I don't claim to be an expert, but I do observe. 1) If theres a big move expected vol expands. 2) Once the news is out, unless it really shocks the market, vol contracts, sometimes fast, sometimes a bit slower. What else is there? Most of the time straddles lose money, and sometimes they don't You got something fancier to report?
here is the trades and loss and wins i made during last earning season. Not smash but modest gain. Looked interesting though when graphed.
There are a LOT of factors to consider when trading earnings. IV will increase for all stocks, but for some it will increase more than others. The main challenge is to find stocks that historically tend to move more than the implied move. For example, for a $100 stock, if straddle price is $10, the implied move is 10%. Is it cheape or expensive? Well, it is cheap if the stock moved 15%+ in most previous cycles. If it moves the same 15%, the straddle will be worth $15+ - that's 50%+ gain. But if the sock doesn't move, IV will go down like a stock and you are guaranteed 50%+ loss. So the questions to ask before trading: 1. Is the straddle price cheap compared to previous cycles prices before earnings? 2. Is it cheap compared to historical post-earnings moves? 3. Does the stock move on average more than the implied move? Even if you get all parameters right, the stock can still deviate from historical patterns, and straddle will experience heavy loss. Unlike other strategies where you can implement some kind of stop loss, you cannot do it when trading earnings, so the only risk management tool you have is position sizing.
All trades were straddles held through earnings? Same position sizing for all trades? Would you mind to share the details of NTNX trade (which accounted for 90% of the total gains)?
Your returns' dependence on 1 trade would lead me to believe that your strategy is not very robust (i.e. capable of withstanding a wide variety of market conditions, moves, etc) As a quick and dirty estimate, a straddle implies a probability of profit of around 55% for the seller and 45% for the buyer. The seller of a straddle has to be compensated because of the unlimited potential risk it's facing (zero on the downside and infinite on the upside). Statistics show (and again, statistics are the past but it's the best we have) that in most situations (around a 10 to 15 percentage points edge) the implied move in earnings is OVERstated so it favors the sellers. Of course the actual move compared to the implied move is only one factor and the determinant of profits is a combination (position sizing, strategy, timing, exit strategy, etc)
I think it's a good estimate, at least as an approximate number. The biggest issue with this strategy is its unpredictability. Even if buying straddles did have a statistical edge (and it doesn't), the edge would work on sample number big enough (100-200 trades or more). In the short term, you could still have 5-10 consecutive losers, which means your position sizing should be very small. As a side note, NTNX (which was the one big winner) actually moved much less than expected in August cycle, so I'm not sure how this trade could be a winner.
if anyone can point me to very good black scholes and binary options concepts, will hugely appreciate. Sure there are lot of 'em when googling, but first few one checked is either not practical or too complicated for the noob like me. Something that explains in simple manner and use examples. Thanks!