Playing with different strikes and ratios until I get a risk graph I like and a vega value that is high and a maximum loss I can live with. No exact science to the numbers, just testing and retesting until I am satisfied.
Coach, learning from your idea. how about looking at GS which will usually do their earning announcement in the third week of Dec. I do a model for GS earning for Jan 2006, GS might announce their earning on 12 Dec, so it is just a few days before Dec option expiration date for the next earning. I look at the following option chain : Price based on 31 Oct 2006 GS closed at $189.79 STO 1 Dec $200 Call $3.3 BTO 2 Jan $195 Call $7.20 BTO 2 Jan $185 Put $6.2 STO 1 Dec $180 Put $3.1 Put in the position at a debit of $2040, IV around 25%. The maximum loss is $500 in this case by 11 Dec 2006. Put in the position and wait. In 6 weeks time (11/1/2006), IV to go up 30%, the porfolio will make $191 if GS remains at this price. If IV goes up 30%, and the P&L - If price up $10, makes $564 . If price up $20, makes $851 - If price down $10, makes $314 - if price down $20, makes $449 Put in a position and wait, no matter how price swings (swings up or down more than $25 the better), as long as IV goes up. Any comment ?
If you really feel that DEC is where the spike is going to occur then you need to be long the DEC options. Problem is it is hard to tell if it will be by DEC expiration. If you buy DEC and earnings is scheduled to come out after DECX, then DEC lose all IV and JAN gets inflated. That is why I have been using longer-term options than JAN for the longs because in most cases I cannot tell if the earnings will be before or after JANX and I just want to make sure I am covered. Goldman Sachs has a current IV of around 26% which is not quite at historic lows so I might pass on this one for an IV play. However it can be played as a non-directional play if you do expect a significant move in either direction. I would probably lean towards APR/DEC to give yourself plenty of time to be right.
Coach, Thank you for the reply. Right after I made the post, I checked on the history of IV of GS. You are right that GS is not in the low end of the IV range and the IV increase towards the earning announcement might not have 30% that I am looking. So I am dropping GS for this strategy. Some stock under consideration include the following with IV change in 2-3 month assuming due to earning. IV data from ivotatility.com : 1) AAPL : IV 30-50% 2) GOOG : IV 30-60% but high capital required 3) AMZN : IV 30-60% 4) YHOO : IV 25-50% 5) EBAY : IV 30-50% The list below should be more promising : 1) OSTK : IV 40-92% 2) SNDK : IV 36-83% 3) NVDA : IV 30-75% 4) BIDU : IV 41-87 % I will need to spend some time to backtest the above. Besides businessweek(some option price is not available), any site that I could find the past option price chain ? Coach, one question, when do you consider buying strangle or straddle for this strategy ?
Added APPL today looking for vols to increase over the next 2 - 3 months and perhaps a move back to recent highs or lows: BTO 15 AAPL APR $75 Calls @ $10.60 STO 7 AAPL DEC $75 Calls @ $5.50 STO 7 AAPL DEC $75 Puts @ $1.60 BTO 18 AAPL APR $75 Puts @ $5.50 The numbers I chose were based on testing for best Vega/lowest Delta I could create while keeping the net debit at a reasonable level. The max risk at DEC expiration with flat vols is about $3,700 but it is hard to pinpoint the max risk since I could sell premium in JAN through APR to reduce the net debit and bring it to a net credit or at worst, a much smaller net debit.
Basically with OptionVue I play around with the ratios and strikes until I see a vega and delta and risk graph that I like, while also testing for vol changes. I do not have a specific formula really I just use my eye and keep ajdusting the numbers until I see something I like.
My approach with these positions is to create a diversified portfoio of these volatility plays, maybe 10 - 20 depending on how many good candidates I find. Having many different positions will allow me to make regular adjustments to bring in prmeium and allow for significant profits on the few stocks which make large price swings. I can diversify enough so that one or 2 duds do not take away much from the winnings I can generate over time. Naturally all positions can theoretically lose at once but with so many adjustment and premium selling opportunities I can keep reducing my risk exposure and let time work for me or vol increases help me out down the road.
RIMM at a really low percentile in IV after its earnings release and jump in price. Opened a Ratio Diagonal Calendar Spread today: RIMM @ $119 BTO 15 RIMM MAR $120 Calls @ $11.80 STO 6 RIMM DEC $125 Calls @ $3.60 STO 6 RIMM DEC $105 Puts @ $1.30 BTO 15 RIMM MAR $120 Puts @ $10.40