Credit Spread Advice Needed!

Discussion in 'Options' started by Shazbatz30, Nov 20, 2011.

  1. I speculate that XYZ stock will go up the day earnings are announced, and also that the option IV will decline on the day of that announcement.

    I was thinking OTM Bull Put Spread. What other methods would you guys suggest in this scenario keeping in mind that the trade will be initiated on the same day of the announcement before the IV gets crushed?

    I have theoretical knowledge of options but have not executed many trades in my lifetime. I usually trade the underlying securites and have now considered adding some premium selling strategies to the mix.
     
  2. 1) Covered-call
    2) Bull-call spread
    3) Short-put
    4) Those would "benefit" from the price rally AND volatility decline you are expecting. :cool:
     
  3. Some other ideas to add:

    If the near month's IV has inflated heavily and the 2nd month has also inflated a bit (skew), there are a number of possibilities with straight and slightly ratioed calendars, ATM and OTM. These would only be viable if you're betting on a rise no more than 1-2 strikes above the short strike. Above that, you lose. Limited downside.

    If you're very close to near term expiration and 2nd month IV has inflated a lot, a reverse calendar has good potential if the UL moves up or down a lot... lousy if flat.

    These are limited risk/reward situations but if the skew is good enough, the R/R ratio can be favorable.
     
  4. Thanks for the suggestions.

    What if I intend to exit the trade within two trading sessions, or earlier?
     
  5. If it's a 2 days or less trade, you're concerns are IV contraction and price movement. If a longer tome period, time decay becomes more relevant.
     
  6. Firstly the market generally prices options efficiently. So the iv collapse you are expecting will generally come at the expense of some other risk factor (delta or gamma). You should think about whether selling options to capture the iv effect will compensate you for this other lost factor. If you think something will go up will it ne better to just buy stock instead?
     
  7. afalde

    afalde

    ATM butterfly would be a neutral trade to take advantage of decline in implied volatility. Widen strikes until your peak is about 2 times your risk.

    Break even range is usually very wide and offers a good risk/reward ratio.
     
  8. Actually I do, but I end up scratching many trades that are somewhat non-movers after my buy signals are initiated. I did notice however that in most of theses trades IV compression does occur after the news release.

    Another factor is the widely limited overnight risk associated with holding the stocks. If I can limit this risk more and profit off some of the weak movers, then it may be worth doing spreads, even if my profit potential decreases. Maybe I should just start out small with some basic ATM credit spreads, I assume ATM is where I can capture larger delta movement and IV compression.
     
  9. Do you see any advantages to using calendar spreads to do this versus using regular credit spreads?
     
  10. Each has its own advantages so therefore, strategy selection is based on your expectation (hope?) for the UL.
     
    #10     Nov 21, 2011