Hey everyone, so I found something interesting that is not making much sense and hope if you can clarify it. Expected 1 day move is = IV*sqrt(1/365)*Stock Price. On liquid stocks this calculation works beautifully. But on illiquid stocks, things get funky. Let's look at CXO, earnings are after the bell. The expected 1 day move is 5.67. BUT the IV for the straddle is 32%.... so we have .32*sqrt(1/365)*155.50 = 2.60. Obviosuly the market will not give me free bees. So WTF
(In anticipation of your figuring it out, I'm going to write:.......) Congratulations! on figuring it out.
You are comparing two different things. One day expected move is different than straddle price based on 18 days
An eyeballed mistake on my part: The traditional formula uses 1/365 for time, but in practice, I've seen (and used) 1/252, and *generally* gotten better results. The results here would be about 3.03 against your computed 2.60 -- a 20%+ difference. But that won't get anybody to 5.67..... But, having an equation and one unknown..... But I can't: it's 2pm, and I have a lot of work before 3pm. FOMC tomorrow means I have no overnight available......
The straddle is 8.90 mid. After earnings the vol usually drops to ~27% meaning the straddle will be worth ~ 7.40....8.90 - 7.40 = 1.50 expected move tomorrow. No where near 5.7. Even if it dropped to 20% vol which it never has in the past 4 earnings, the straddle would be ~5.8. Meaning a 3.10 move tomorrow. If I look at my bloomberg screen it tells me that the average move over the last 8 quarters is 3.8% which would be equivalent to a 5.89 move. So this straddle is trading dirt cheap. Srinir can you look into this and correct me if I am wrong. It's a profitable play if I am right. Thanks
Earnings is like jump model. One day IV on earnings day is much higher compared to 18 day option IV. I think sle and kevin explained it better here. https://www.elitetrader.com/et/thre...s-before-earning-good-strategy.300093/page-12 https://www.elitetrader.com/et/thre...s-before-earning-good-strategy.300093/page-10 Based on Option vue vol ramp model, expected stockprice range is between 149 and 160. So expected move is in range. Good luck tomorrow. I have to go pickup my kids from school