Spindr, one more question (promise Ill go away and wont come back till Ive done more modelling) you mentioned that you like to see an inflated skew of at least 15 points. Are you referring to your requirements for a calendar or reverse calender here?
No need to stop asking questions or go away. My apologies for not being more specific. We've been knocking several things around and they've sort of run together at times. The 15 BP's of IV is for pairing the backspreads not for double reverse calendars (with one and a half turns
Yep, that be true except that he's no longer offering rope to one specific poster For me, last year was a bonus year for outright trading. None of that IV related wussy stuff
The previous post mentioned ratio 3 means after ER, front month IV drop 3 times as much as back month IV. i.e. if before ER, IV is 90% and 60%, after ER, IVs will be 60% and 50% if ratio is set to 3.
Do you mind to predict future vola levels here (any stock will do)? Front month pre-after report and calendar tenor
lol! Some how I think that "specific poster" will survive. Congrats on 2008. Nothing special for me last year. But, 2009 so far ---- whoa baby!
Let's say you're looking at BBBY. Implied vols in my software are Sep 34.9% (7 trading days) Oct 40.7% (27 trading days) Nov 38.1% (52 trading days) Using excel you can calculate that market expects 7.25% volatility jump on earnings, and non-earnings vol of 2.2%, or 34.8% annualized. Looking at the last 3 earnings for BBBY I see that historical earnings moves (close to close) were 9% (june), 21.7% (apr), 4.5% (jan), average of 13.9%. So, market expects earnings jump for BBBY to be lower than recent earnings jumps. Furthermore, if you extend these numbers father out, you can forecast that october implied volatility will continue to rise until the earnings date (sep 23 , in 2 weeks ) reaching the high of 43.3%, and november vol will rise to 39.6%. After earnings both implied vols will collapse to 34.8%. This above will of course depends on the overall vol staying the same, which never happens, but I wanted to give some hard numbers instead of handwaving. In parallel with pengw's analysis, oct vol will drop by 8.5% and nov vol will drop by 3.8% with ratio of 2.24, which is close to his (universal) ratio of 3.
DD , I appreciate direct and non BS answer, thanks I personally donât agree but if it works for you that what counts
Spindr0, I was reviewing your earlier post on CRB's and you said yousaid candidates needed a minimum IV gap of 15 points. So this would mean your selling near months and buying more far out months(higher strike), correct? this gives you a positive Vega position. I would have thought if you are betting on a close of the gap and a general decrease in the IV you would be heavy on the near options. What is the line of thinking with that? Ive gone back and tried it on a few previous EA's but yet to find th eright conditions for it. Any specific EA's that worked that come to mind?
1) you said candidates needed a minimum IV gap of 15 points 5 BP's needed to evaluate a position NOT do it 2) So this would mean your selling near months and buying more far out months(higher strike), correct? this gives you a positive Vega position. I would have thought if you are betting on a close of the gap and a general decrease in the IV you would be heavy on the near options. What is the line of thinking with that? If your belief is that the underlying isn't going to move, go heavy on the near term options. 3) Ive gone back and tried it on a few previous EA's but yet to find th eright conditions for it. Any specific EA's that worked that come to mind? Here's a hypothetical for you. Consider a calendar strangle. Stock at 52 Price a near month 50/55 at .65 Price a 2nd month at .50 Overnight post EA expectation is .45 (pretend both will go there) What would be a ratio of contracts bot/sold that would balance the maximum loss in either direction? Then, would the risk graph have an acceptable risk/reward ratio? Do the same evaluation for diagonals. These types of positions may not be for you but until you start modeling them, you won't know and all the word descriptions in the world will be meaningless.