How to capitalize on post-earnings IV crash?

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

  1. Been there, done that..... No edge there.

    Trading earnings is absolute speculation.
     
    #21     Jan 8, 2011
  2. spindr0

    spindr0

    I see. If you can't do it then it can't be done. Got it.
     
    #22     Jan 8, 2011
  3. Didn't say that I couldn't do it. It was my main strat for over a year and for the most part it was profitable. The better I got at it, the more I realized that there is zero edge in trading the IV drop after earnings.

    If there is no edge then by definition it has a negative long term expectancy. If you like gambling and speculation, more power to you.

    Just answer a few basic questions for me.

    1) Can you accurately forecast the amplitude of the drop or rise in the underlying, post earnings.

    2) Can you consistently predict the magnitude of the IV drop.

    3) Can you consistently predict the direction that the underlying will move after earnings?

    4) If you answer in the affirmative, are you willing to be put to the test? It is a very easy thing to prove. It is earnings season after all.
     
    #23     Jan 9, 2011
  4. spindr0

    spindr0

    I traded EA's heavily for several years and net net, was profitable. I had no ability to predict how far and how much the underlying would rise/fall nor the magnitude of the IV drop other than it was going to drop, usually a good chunk of the pre EA expansion.

    The edge that I had was that there were set ups where the disparate relationship b/t near and 2nd month IV presented higher probability trades. Perhaps "advantage" is a better word than "edge" given that ET's semantics police will endlessly debate what an edge is or isn't.

    There are several reasons why I don't do many EA's now. There's an immense amount of time spent:

    - keeping track nightly of the EA dates since many get delayed

    - screening for underlyings with high IV

    - sifting through multiple option chains for the above, screening for those that meet minimum a IV differential

    - setting up platform orders for multiple ways of entry, eg. a diagonal calendar strangle can be entered via two strangles or two calendars (synthetic combo orders don't always add up to the same price)

    -setting and resetting price alerts all day as the UL moved

    - keeping an eye on the UL after EA release during pre/post market hours since a large mover occasionally needs equity support


    There's a bit of an art to closing these (near month collapse tends to be immediate, 2nd month tends to have an initial down spurt followed by gradual contraction as the morning progresses). Many trades are nicely profitable when worked in the AM whereas on a close to close basis, they are much less so or even losers. I could have several of these going per AM but if there was a fast market in one, something got neglected.

    The short answer is that this entire process is very time intensive and I found a better/more lucrative way to trade with greater reward/less risk potential which meant that it could be done in greater size.

    My reaction was to your comment that one can't capitalize on the post IV crash successfully over the long term. I think one can but I agree with you that big money isn't there.
     
    #24     Jan 12, 2011
  5. Sell Intel Calls Before Earnings, Goldman Sachs Says (Update1)
    (Updates with closing prices from fifth paragraph.)
    By Cecile Vannucci and Jeff Kearns
    Jan. 12 (Bloomberg) -- Investors should buy Intel Corp.
    shares while selling its call options because the contracts are
    “expensive” and the chipmaker will probably retreat after it
    reports results tomorrow, Goldman Sachs Group Inc. said...
     
    #25     Jan 13, 2011