Buing strangles prior to an important event?

Discussion in 'Options' started by thenmmm, Nov 4, 2010.

  1. thenmmm


    I am sure this has been tried to death...but is there any success?

    For instance...you buy deep otm call and deep otm put some time before the announcement of a major economic news related to the stock. Is the volatility then carefully adjusted...or it's close to the historical mean? It should be...at least in the context of EMH - that is...the implied volatility should become much larger prior to any known announcement/meeting, etc. - that is...it's enogh to know that something will be announced to rule out this strategy - if the news on the other hand comes unexpected (such as...Buffet dies out of a sudden...), volatility should be...normal and someone with an inside information will benefit. I find it hard to test this strategy on historical data to see if there's some premise - though not impossible, but i am trying to save some time so far.

  2. I've never felt comfortable with any strategy that depends on a discontinuity with unpredictable results. Will the event cause the market to jump a little, a lot or not at all? Will the jump be up or down? Will the event cause a suspension of trading?

    Not all of these will be good for you and they are less predictable then non-event times which are unpredictable enough already.

    Author - "These Seven Trading (Investing) Secrets Will Explode Your Account: All I Know About Trading (Investing) I Learned in Flight School"
  3. thenmmm



    Yes, I misspelled the title...it should be "BUYing" and NOT "buing"...but I am sure most people here are intelligent enough to notice this. And here is what I mean explained in even clearer and brief terms:

    1. Suppose the price of a stock is $100.
    2. You know that a company XYZ will announce later today it's profits for the last fiscal year. But you don't know if it's gonna be a...good news - or a bad news. What you expect though is high volatility in the stock.
    3. So hence you buy otm call at say $110 for say $0.001 and otm put at say $90 for again $0.001 and same expiry date...say 3 months from now.
    4. What will be the implied volatility in this case? Is it going to be much higher than the historical volatility - simply because everyone is expecting the news and some big volatility - hence the sellers should be compensated and buyers should pay more to compensate the sellers? Or...the volatility will remain unchanged as if nothing has happened?

    basically...i am 99% sure that the implied volatility will be sufficiently higher in the case described above - otherwise...the "statistical volatility arbitrage" on such event driven case scenario will be a piece of cake and even a free lunch.

  4. thenmmm


    Exactly...this too was one of my 'fears'...so to speak... It's hard to predict how much the price will change - given the news.
  5. thenmmm


    but...on a side note...mind you even a "neutral news"...such as...in the case of an FX option whereas the eur/usd would solely depend if the European Bank decides to cut the interest rates, left them unchanged or rise them - even so if the "left them unchanged" option turns to be the news, this could still generate some swing in the price movement in any direction and it will outperform the predicted daily volatility - given cognitive bias and other things not liked by academics :).
  6. dmo


    Over time, going into events that are much-anticipated and well-publicized, you'd probably do much better shorting straddles or strangles than buying them. When the anticipatory excitement is high, the reality rarely does it justice. Every now and then of course you'll get creamed, but that's premium selling for you.
  7. 1) strategy works - borrow all the bucks you can
    2) doesn't work - take up the cooking channel

    several 1000 stocks have options and report quarterrly. ever consider looking at them to see if strategy viable?
  8. Here's my two cents. In what alternate universe do you find an earnigs play hours before the announcemnt on a $100 stock with 3 months until exp whose 90p/110c strangle costs your two 1000's of a cent?
  9. As you largely tell yourself at the end, the IV will be high, and the option prices won't be remotely close to .001 for a $100 stock with an option 3 months from now - yes I know you are talking about strangles - they might be worth $100 even $30 OTM if there is much chance of movement - you are not the only one who knows if earnings or an FDA approval announcment is coming.

    Your $10 OTM options could easily cost $500-$1000 each depending on exactly what the stock was, etc.

  10. thenmmm


    how about checking the meaning of the English word: "example"...
    #10     Nov 8, 2010