BIDU earnings

Discussion in 'Options' started by scriabinop23, Feb 14, 2007.

  1. candeo


    On BIDU, IV on the Feb 115's dropped from 112% to 76%. You are saying that IV drops more on the way down than on the way up even in these kind of situations? Because of fear?
    If that is the case, it might be good to create short horizontal spreads with a bias to the upside (maybe with ratio or different strikes) so that you benefit from it if stock goes up and if it goes down you profit from IV crush. What do you think?
    #31     Feb 15, 2007
  2. candeo


    Well, my Mar/June 40's did ok, because there were more in the money. WHy does it make a difference? When they are more in the money, back months suffer more from IV crush?
    #32     Feb 15, 2007
  3. gangof4


    i bailed early (probably too early) and took my ~27% profit already. not much strategy to analyze- i bet that the stock would move more than my basis for the straddle ($9); assuming that my longs would trade @ intrinsic value only. sold for 11.51. the paltry reward wasn't really in line with the risk- but a gain is a gain- beats a loss, so i'll take it.
    #33     Feb 15, 2007
  4. candeo


    One last question, from anyone here who can help: I thought back month were more affected by IV. In fact Vega was much higher on June than on Feb. I think it was 7 or 8 yesterday. Then why is it that the Feb's are the ones that got crushed more?
    #34     Feb 15, 2007
  5. This is an interesting point of discussion - even though vegas are higher on rear months, in Interactivebrokers' option trader, it shows IV has much higher in the front month.

    so makes it kind of difficult to figure out whats going on.

    For what its worth, your short vol spread works best in big point drop or a much bigger gain. If you noticed on the bidu straddle, I sold the Mar 120 and bot Feb 120. Profit on those 5 spreads was $200/spread. Very nice. Of course I got a nice 12% move on the stock. Perhaps on these IV crush situations it might work to do both the short front month straddle, long rear month strangle, and your inverse calendar trade (in this case, long 120 front/short 120 rear) in a more equal distribution. It seems the iron butterfly component of this trade (long strangle same month as short straddle) was its weakness.

    Having the hedged strangle in the rear month performed much better. (as you can see, the wider 100/135 strangle almost entirely helds its value with that big move, while the 105/125 in the same month broke down). The long 105 Feb put performed a bit worse than the long 100 Mar, and both provided approx. equal hedge. The 100 Mar was only slightly more expensive than the Feb, and provided a much more flexible hedge (letting me carry it over as an outright in the following month if I so chose).

    Very happy with how the day ended. I acquired some 105/100 Mar calls mid-day, and closed out my entire short put position end of day, so no pin risk exists. My net delta exposure is similar, but for at least tommorow I'm entirely hedged (remember I still own a ton of 100 and 105 puts). I'll reduce my overweight long call position in a few days, if not tommorow, depending on the movement. I'm essentially straddled at 102 for March, at bargain basement prices (post earnings IV crush). I don't like being long this much vol and theta for long ...

    All would've been much easier if we just opened at 115. But thats how the game rolls. The position will be net profitable now with even a slight move up (to 107/108 or so) or a large move down. Preferrably, a move to 115 first, and a crash to 95 by end of day would be nice.

    #35     Feb 15, 2007
  6. candeo


    You make some really good points. I like your idea, I will look into it. My thoughts about front months getting crushed more than back month: even if Vega is smaller, there is more premium in the front month because there are in high demand ahead of earnings. What do you think? This is why might be more interesting to pick 2 and 3 months out instead of front month and next month. Vega calculations don't take into account the fact that we are one day before earnings. Or we can do a mix, to try to take advantage of both. This is what I was thinking with the CMG's trade I posted in another thread.
    Anyway, we have some time to think about it now until next earnings season as it is the only time when we get such an IV crush.
    But tomorrow is expiration day, good for some pinning action. I was thinking about doing a short Iron butterfly on GOOG: sell the 460 puts and calls, buy the 470 calls and the 450 puts. Do it tomorrow at opening. What do you think?
    #36     Feb 15, 2007

  7. good idea.. maybe on aapl too.
    #37     Feb 16, 2007
  8. I think considering, especially on this earnings week, that there are two or three days left of premium, vega and theta must be incorrectly calculated for many of these option calculators. (that is, larger portion of option value is attributed to theta than vega) It makes sense that a larger portion of the option value in front month is long volatility.

    Thats what makes spreading IV between two months so interesting.
    #38     Feb 16, 2007
  9. candeo


    AAPl: premiums too low. I passed on the GOOG trade so far anyway, too far from $460. I might consider it later on, maybe with a ratio to bring the breakeven point closer to $465.

    Anyway, I looked at your suggestion of the straddle+RC. It's looking real good on simulation. But again, it would have to be a ratio, ideally to bring it to a vega neutral trade, or vega negative, so we would benefit from IV crush.
    Got a decent profit this morning legging-out of CMG.
    For our little study about IV:

    Feb 60: 83.79% to 65%
    Mar 60: 33.8% to 17%
    Jun 60: 25.06% to 19.35%

    So, for example, you can see that there was a bigger crush in the Mar's than in the Jun's, even if Vega was twice as big for the June's.

    It would be great if someone with more experience of those situations could comment. This can change the whole picture. Maybe I will start a separate thread about this.
    #39     Feb 16, 2007
  10. candeo


    You can still do the trade on GOOG now, but at $470, as this is apparently where they are going to pin it.
    #40     Feb 16, 2007