Iron condor right before earnings?

Discussion in 'Options' started by ll00l0l, May 22, 2009.

  1. ll00l0l


    Hi, I am relatively new to spreads.
    Since options premiums generally decrease after earnings (due to drop in IV?), would it be a good strategy to open an iron condor right before an earnings release, to take advantage of the drop in premium after the release? This way, whether the price goes up or down upon the announcement, the position is hedged equally.
    I know that you would have to make sure the short strike prices are far enough away from the current price to avoid them becoming in-the-money, in case the price jumps/drops significantly.
    Thank you
  2. Sounds like a risky idea to me, although I've never tried it.

    Implied volatility often tends to increase before earnings for a reason: to account for possible above-average price swings. So the market sees this possibility as real, and the market may be right. So you may actually have a higher risk of being in the money, by betting that nothing extraordinary will happen.

    Nowadays, anything can happen :)

    Maybe I'm wrong :confused:
  3. bebpasco


    There will be some circumstances where a long iron condor (short the guts & long the wings) will work. But, for the vast majority of before/after earnings plays, I would suggest that you look at unbalanced calendars & diagonals. Get a good risk graph (P/L) software package to model these spreads. I think the OIC website has a free risk graph software package that allows you to change the IV after the event (earnings). It's not great but, for starting out, it should be okay until you get a better feel for this strategy.

    Believe me, this is not an easy trade. You have to have confidence in your projected IV numbers and your ability to execute at reasonable prices.
  4. The best way to look at this situation is that it provides accelerated results.

    In other words, you know you are going to benefit from a rapid IV decrease - and that happens all at once, instead over time.

    You also know that the stock has a very high probability of making a substantial move TOMORROW, rather than over time.

    Thus, after earnings, you will have a quick profit if the stock does not move, or a decent loss if it does.

    There's nothing wrong with the play <i>per se</i>, but neither can I recommend it.

  5. As Mr. Beb Pasco suggested, look at unbalanced calendars & diagonals (I assume he meant doubles) so that you can control the draw down if the underlying heads toward a short strike. In addition to having confidence in your projected IV numbers and your ability to execute at reasonable prices, you should also know:

    1) Where your inflection points are if there are reversal areas in the risk graph (for example, a W or M shaped P&L curve)

    2) Where your breakeven points are. You can project/guesstimate them from modeling software but you also need something to calc the P&L once the news breaks and the prices fly

    3) How to adjust the position, not only to stem losses but to lock in profits and that means during regular hours as well as pre and post market trading.