MR - Vol Sale After Earnings and Why

Discussion in 'Options' started by livevol_ophir, May 11, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    MR is trading 32.49, down 7.2% with IV30&#8482 down 14.3% on earnings.

    <img src="">

    With earnings yesterday AMC, the company has traded over 6,600 options today on total daily average option volume of just 488. 4,200 of this volume has been in a Jun 30/35 strangle (sale). The Stats Tab and Day's biggest trades snapshots are included (<a href="">in the article</a>).

    The Options Tab (<a href="">in the article</a>) illustrates that both the calls and the puts in the strangle are almost all opening (volume > trade size by a lot). Also, you can see the month by month vol drops after earnings.

    The Skew Tab snap illustrates the vol that's getting sold relative to the other options (<a href="">in the article</a>).

    You can see that Jun (yellow) is elevated relative to Jul (green) and about the same as Oct (blue) which will have an earnings release (a vol event).

    Finally, the Charts Tab (6 months) is below (<a href="">in the article</a>). The top portion is the stock price, the bottom is the vol (IV30&#8482 - red vs HV20&#8482 - blue). The yellow shaded area at the very bottom is the IV30&#8482 vs. the HV20&#8482 vol difference.

    I've highlighted the $30-$35 range for the stock. The strangle sale gets max gain between these two values - it breaks even at $28.47 and $36.53 (assuming $0.88 sale in the puts and $0.65 in the calls).

    If you look between the two "E" icons (i.e. the last two earnings), you can see the stock does tend to stay range bound. That was a 3 month window, this is just a one month strangle. The news is out, if the stock doesn't "drift" and no new surprises get announced, this trade makes some sense.

    This is a good example of not selling earnings vol b/c the move can be huge - and waiting after to earnings to sell, even though the vol is much lower. Traders actually do this fairly often.

    This is trade analysis, not a recommendation.

    Details, trades, prices, vols, skews here:
  2. Do you tend do that with smaller-caps because they may be more likely to have a "surprise" (even though people will still talk about Google's April-2008 earnings report for years to come)? :confused:
  3. livevol_ophir

    livevol_ophir ET Sponsor

    It's just trends. If a company has say 7/8 times after an earnings move tended to stay put for a month or more after, we might sell a strangle.

    It's the same idea as buying or selling the front ATM straddles the day before earnings and closing the day after. Look for trends that seem to offer an expected pay out > 0 with reasonable risk parameters. In trader talk, it's just called "edge." But really, it's just trying to follow certain patterns.
  4. live,

    It seems to me that that could be a good trade - I mean I think the percentage chance it will work is probably high.

    My question becomes what about the big event happening and it fails badly? It appears this trader isn't specifically covered. On the put side, I assume they might just be willing to take the stock if they had to (of course, they might try to get out of it if they just had a modest loss, but I mean a solid gap down I assume they might just take the stock).

    On the call side, isn't this possibly one of those horror stories waiting to happen? What if MR gets bought out for a 50% premium? Do most traders who do this build up enough profits to take the occasional hit such as that (which I admit is likely to be quite rare)?

    It just seems to me that hedging your risks is one of the keys and great things about options, but other then building up enough profits from earlier trades, there doesn't seem to be a hedge here (of course, if a stock soars during a day, you can do a stop-loss thing, but a large gap up on a solid buyout would make this trade do very badly!).

    Interesting threads in any event.

  5. livevol_ophir

    livevol_ophir ET Sponsor

    Hey Jacks,

    Without giving a really drawn out answer - you're intuition is correct.

    A huge mistake beginning option traders make is betting on the other side - the takeover, the disaster, whatever. It's actually bad luck if you win one of those early in your career as it incorrectly shades your decision making. Don't get me wrong, I'd love to buy a 0.05 option and watch it go to 10, but that doesn't really happen...

    But I can sell $5 straddles which expire worth $1 several times a month (or similar type strategies).

    The best traders I know are short vega, short premium, short the meat but long the wings... so net long options...

    That way they win "most" of the time and if something nuts happens, they win, or at least don't suffer a huge loss...