ISRG vols crushed to 40% off their highs of 70%. The vols are at historic lows and the vols have had a tendency to ramp up leading into earnings. Therefore I opened the following Diagonal Calendar Ratio Spread using April and DEC to play off a vol ramp up going into January or big move: BTO 11 ISRG APR $120 Calls @ $6.60 STO 6 ISRG DEC $120 Calls @ $0.70 STO 6 ISRG DEC $85 Puts @ $0.95 BTO 11 ISRG APR $95 Puts @ $9.30 Each time vols hit 40% they eventually ramped up to close to 70%. The position currently has a $vega of $480 so long lots of vega. A 30 point move higher in vols by DEC expiration locks in a results in minimum of $7,500 in profits if closed and as high as $15k if ISRG moves back to recent highs. If vols stay flat to DEC, max loss at that point is $4,300. Of course with APR options I have a few more months of time to make adjustments and reduce any net debit/risk. This is a play on vol spike into the next earnings which has happened frequently as indicated below:
Yeah the jump to 70% is in the front month. APR just has to move 7.5% for the risk graph to move above the zero line. Also, the IV ramp up will allow me to roll into short options into the next month after DEC if I need to and reduce the risk even further. I am looking for an overall IV increase and large move which ISRG has displayed in the past. I could have gone lon ghte JAN isntead but the time would be too short and the vegas are much smaller. So even though APR will not move as much if IVs move higher, the overall vegas are high still allowing me to get some profit. I do not necessarily have to get out at DEC, that is just my first date target for the short options. If DEC expires worthless and JAN ramps up in IV, then I get to sell inflated JANs for more premium and play it moving forward. The whole idea is that I am getting in at low IVs and trying to play IV increases over the next few months without taking any specific directional bias, pure vol play.
It seems you might be catching on that not all trades need to be done for a credit... To be clear, your GOOG trade is not earnings related. The December and March volatilities will not really be effected by earnings volatility cycles. It's a pure market neutral long VEGA strategy. Long back month options "financed" by short front month options. Ratioed double diagonal (short condor). It's no more a magic position than any other, however, you implied that this position was particularly suited to GOOG at this juncture. I'm unable to follow the reasoning for that. Whatever you want to call it, it can be hurt quite badly by a drop in IV, unilateral or in the back month. The non-transparent risk is tenor skew or "time VEGA". These risks, you may have omitted from your analysis. It's more common to anchor the long legs in the reporting month so as to benefit from the volatility run up. Decay can be mitigated by either GAMMA scalping or utilizing an appropriate time spread e.g. straddle/strangle calendars. Then, use the anchor legs as the base for a short time spread to play the earnings announcement. However, establishing the initial position is generally best done as late as possible IMO. Good luck. MoMoney.
LOL yes debits are not evil... These are vol trades so I am not concerned with credits/debits, just the profit potential and maximum reward. If you model the ratio diagonal calendar spreads, you can see that the initial debit is quite high but the actual risk is much much lower. As for GOOG, I am looking for a ramp up in vols and large move in either direction. So you correctly identified it as a long vega neutral strategy. However, I am looking for overall vols to increase with a move in either direction. It does not matter so much that an IV spike will not occur in the MAR month. In fact if DEC expires worthless and JAN spikes, then I get to sell JAN inflated premium and take in more credits while still allowing for profit in either direction. The MAR will not spike on the upcoming earnings but I am looking for all vols to increase somewhat. As noted, the MAR does not have to increase that much relatively. And I did describe the risks of GOOG going nowhere and vols moving lower, that is the profit hole in this position. However I am playing the probabiity that the underlying (Goog) will have a large move from here to DEC or MAR and vols will be higher at some point along that time period for all months or at worst the front months which allow for adjustments. That is the point of this JOURNAL, PURE VOL plays with no specific directional bias, unless a home run bet is placed (NFLD). THus the risk is completely tied up in an incorrect assumption about vols going forward.
OC, looks like ISRG play might work best in Dec instead of Oct. IV ramp up usually occurs 1 mo prior to EA. Why so soon? Will fight theta for next 2 mo's. Unless you have inside info
IVs are at an historic low now so get in at the bottom. I am not concerned about theta as of yet so I do not mind. Theta in the APR will be quite low and thus greater in the DEC. Although the position -theta now, it is not that big will be offset by any increases in vol w hich is what I am playing. Also, I cannot pinpoint exactly when IVs wil increase so I get in low now with no worries about timing and let it sit. Theta is not an issue for me solely because I am playing the vol ramp and the potential move in the underlying. I could get in cheaper if I waited but then you are asking me to predict the best time before vols ramp and get in. Moreover, DEC options cost more now which I am selling to reduce the net debit slightly. What if vols ramped up sooner because of news or for any other unexpected reason. I would rather get in now and move on to the next position and let it run. You certainly could get in at the end of November but I think the timing of the entry is subjective and do what works best for your assumption/expecatation.
I am willing to bet my left arm that as soon as December hits, IV_Trader will activate his proprietary system that has an alarm go off in his basement with a sound so loud that breaks a glass cover around a bowling ball, which in turn slides down a ramp and pushes against a hook that in turn hits the buy button to purchase the Feb delta neutral combo at the best fill available.
Fair enough. There are some interesting things to look at when an IV spike occurs that is not related to earnings or other scheduled event. e.g. what happens to tenor skew. Which months benefit the most. What happens to the smile. If it's a level dependent volatility spike, the implications this has on DELTAs . Percentage changes in VEGA for OTM options versus ATM options etc. Doh! I won't be journalizing any of my trades here Nothing further to contribute... Good luck! MoMoney.