I was looking at a simple bull put spread a few strikes OTM and closing no later than Thursday afternoon before earnings. Last time I held the spread through earnings and had GOOG move 40 points against me and I lost a fair amount on the spread. So from my view it's a conservative credit spread that's a "sell on (before) the news" strategy.
is this is a qtr when the PEG will be readjust ? G-d help them if future growth deeps below 40...look out < 500 than. On the other hand , its a brand new world of valuations after 8/16. Place your bets !
The ATM straddle is a crap shoot in GOOG for earnings. Last earnings it would have been a huge winner. The several quarters prior it was a loser. Obviously volatility is pumped heading into the number. If you're long the straddle you have a much better chance if you're actively trading the gamma via the underlying especially in AH. 2 or 3 strikes away from the ATM's in a straddle is is really just a straddle where you're taking a view in the underlying. The ATM straddle is essentially delta neutral so as you choose a straddle with a lower or higher strike all you're adding is delta as you move away from the ATM straddle. As far as strangles go unless you're talking about selling them I think its much more difficult to make money on them. With the Straddle as soon as the stock moves you start to have real opportunity but with the strangle it take a lot larger move. Trading the earnings on GOOG is a difficult game especially if you're not very well capitalized and a very active gamma scalper.
IV great answer I love that one! Like a roulette wheel. The brave new world, its a classic Thanks for the great post!
The options guy at TSCM was laying out a rather tight IC on GOOG in his model portfolio --- I wasn't exactly sure why....600/610/630/640 seemed way too constrictive for a stock that moves radically at earnings-time -- I'd never do one that tight on GOOG! Now, I could see doing an (much more DOTM) IC like 570/580/670/680 and close it before earnings...at least I'd sleep better for the next few days. But to have a 20-point spread on GOOG at earnings? That baffles me. Disclosure: I am thinking of doing that DOTM IC today and closing it before earnings.
Just like with the OP's DD, you probably won't be able to short any IC and cover before earnings with a profit...any theta decay will most likely be offset by an IV increase. If you really wanted to run a trade from now and close pre-earnings, you'd probably be better off just going long vega with a straddle...even then you may be late to the party.
I notice in the recent Informer newsletter, Len Yates - the President of OptionVue Systems - wrote about just this. he looked for growth stocks that are likely to move a lot (scanned for stocks that have PEs>50, 50% year-on-year revenue growth, high price/book value, etc) and he came up with 12 candidates - one of which was Google. He went back to see what would happen if he placed a one lot ATM straddle on each before earnings releases over the past couple years. He put the trade on the day before earnings and closed it in 1 to 3 days after. I attached a picture of the chart of the results he had for Google in the newsletter to this post. You will notice that 7 of the 12 were profitable, but the real money came from one big move. Most of the other stocks were also profitable over time, but again relied on one or two exceptional moves to make the money. So it seems the options are fairly valued most of the time, but that once every year or two these kinds of stocks end up moving more than the market expects and you make a killing. The only thing is that I would guess most traders will not have the persistence to keep doing this every quarter for a couple years, basically breaking even, until they hit the big one. I think you need to be an OptionVue 5 owner to get the Informer newsletter, but they also have free option trading articles and a free monthly newsletter at www.discoveroptions.com
Closing "1 to 3 days after" makes a huge difference with GOOG since the earnings seems to be mostly the day before options expire. How long to expiration with those straddles ? one day or one month? Should have been consistent with closing the position, but that would be easy to recalculate. Looks like all the October straddles are profitable.
I did not want to post the entire article without permission, but was only trying to show it may be possible to make money on it, at least over the long term. As anyone that trades a few favorite stocks knows, different stocks behave differently. He noted in his article that of the ones he tested, with certain stocks it seemed to be better to take the trade off at the close of trading on the 3rd day, with others on the 2nd day, and with one stock it was best to take the trade off the very next day. He mentioned in the article that towards the end of his research he was starting to notice that if the stock posted a gap opening of great significance (in percentage terms) it was often better to hold the position longer (and also give the stock a larger range for backtracking) because good follow-through often improves during the next couple of days. On the other hand, if the opening jump was a small one it was often better to take the trade off very soon. He also suggested that for those reasons it would be best to apply a trailing stop and protect oneâs profits, allowing the stock a little room to move, but not much (unless the stock made an impressive gap jump). But he did not test that idea to see if a trailing stop would enhance the results. He did note that using a trailing stop pretty much eliminates the need to figure out whether it is best to sell on the 1st, 2nd or 3rd day following the announcement.
Yepper, some good advice: I paper-traded that 580/590/689/690 IC on GOOG and see the impact of IV on delta as the underlying approaches the stop trigger (600) on the put side of the spread. OTM call side is fine, but the put side is under some pressure. Definately seeing the effect of IV, for sure. Though I wonder, in such cases where you encounter an IV "trap" and your underlying is threatening the put side of your IC, would it make sense to either double-down on your high call spread and/or turn the side of the IC that's under pressure into a ladder by buying another set of puts below (ie farther OTM) than your OTM long put....or perhaps adding to the long put you already have? I think I'll try both and see what happens. Thank gods for paper trading, eh?