How to capitalize on post-earnings IV crash?

Discussion in 'Options' started by turkeyneck, Jan 5, 2011.

  1. What's the best strategy to capitalize on post-earnings IV crash on high profile stocks like AAPL, GOOG?
  2. 1) If you want to carry a position through the earnings "number", let it be limited-risk, with "wings". Those stocks can make gigantic moves from time to time.
    2) If you want to wait for the number to come out, it's a little "safer" to do naked-writing and/or daytrade the stock because you expect increased trading volume. :cool:
  3. It's a little tricky with GOOG, they usually report the day before option expiry so premiums collected will be on the low side. If there is a GOOG "earnings surprise" you are screwed. It's best to buy GOOG options - not sell.
  4. I'd buy a straddle or strangle, trying to get the lowest IV possible, which is of course tough if earnings is coming up.
  5. There isn't a simple cookie cutter one size fits all answer. It dspends on time remaining until expiry, amount of IV expansion (and how much in which months), skew and outlook, if any. Are you chasing premium contraction? Do you want to hedge against the big move? Or both?

    For example, close to expiration with good 2nd and later month IV expansion might favor a double reverse calendar or double reverse straddle/strangle. Or with more time remaining with high near month expansion, the same but not reversed. And one can ratio the long side or the short side depending on whether you're directional or non directional.

    The short answer? It depends.
  6. Do you have any reason to think vol is mispriced either pre- or post- earnings? MMs aren't as dumb as you think.
  7. It's not a question of mispricing. Based on the expectation of a possible move, IV tends to expand pre earnings and collapses post EA.
  8. rosy2


    you have to have a large enough position to make any vol change meaningful. short a one lot straddle when vol comes in probably doesn't even cover retail commissions
  9. Even one naked straddle can make you good money when your commission per contract is under a dollar and there's a post earnings IV collapse.
    #10     Jan 6, 2011