my post wasn't about vega...Your long combo premium ( FEB , MAR , APR) will be higher if price goes up vs going down from here till DEC exp , hence , need more puts at the beginnig of position. The second part was about balancing delta via options ( again , at DEC exp , regardless what DEC shorts PnL did). If at this day your MAR long call is at 7$ , but your put is at 2$ , will you rebalance ( sell calls OR buy more puts) ?
I did a model using the price chain given, is this the risk graph that you are looking at at end of Dec contract with +/- 10-20% ?
Coach, Following your thread, this is the model that I have worked out based on last Friday closing price chain : AAPL @ $83.12 on 10 Nov 2006 STO 1 Dec $90 Call $1.05 BTO 2 Apr $85 Call $8.10 BTO 2 Apr $85 Put $8.20 STO 1 Dec $75 Put $0.55 Debit = $3,100. From ivolatility.com, the past one year of IV range 30-51%, now at 27.4% mean IV. Next earning date : 17 Jan 2007. See the risk graph, with a rise of 10% in IV, it becomes a positive porfolio. Any comment ?
Following the same ideas, it has the same risk graph pattern: 1) AMZN at $39.26 on 10 Nov Past 1 year IV range 25-65%, now 29.4%, margin $1.4k STO 1 Dec $42.5 Call $0.35 BTO 2 Apr $40 Call $3.7 BTO 2 Apr $40 Put $3.7 STO 1 Dec $35 Put $0.2 Next earning on 2 Feb 2007 2) YHOO at $27.39 on 10 Nov Past 1 year IV range 26-50%, now 32.5%, margin $1.0k STO 1 Dec $30 Call $0.3 BTO 2 Apr $27.5 Call $2.75 BTO 2 Apr $27.5 Put $2.3 STO 1 Dec $22.5 Put $0.05 Next earning on ? Jan 2007 ? 3) EBAY at $32.81 on 10 NOv Past 1 year IV range 27-58%, now 31.7%, margin $1.2k STO 1 Dec $35 Call $0.5 BTO 2 Apr $32.5 Call $3.6 BTO 2 Apr $32.5 Put $2.85 STO 1 Dec $27.5 Put $0.1 Next earning on 18 Jan 2007 Any comment ?
Yes that looks like my risk chart. As yuo can see it is very sensitive to vega and that is why I enter it when vols are at extreme lows. Also, playing a directional move over the life of the position.
The IV of each appears to be at the lower end of the range. Also IV in these stocks do tend to rise going into earnings although not like in the good old days of tech rallies lol. My only comment without looking each one up on a risk chart is for you to check the breakeven points and risk picture and compare it to how the stocks have moves in the past. My initial opinion may be that these stocks may not move as big so just take that into consideration. That is the 2nd part of my subjective screen for placing these trades. For example, AMZN would need to move above $42 and below $32 to have a profit at DEC expiration, although you need not close it then. YOu could keep rolling credits each month until AMZN mvoes as expected or vols increase as expected. So not bad but just keep in mind the range of moves the underlying is normally capable of. Last point is that it is good to test these out in small quantities but be aware that using 1 and 2 contracts produces small vegas and deltas and very little profit unless the underlying moves a great deal. Of course the max loss is less to so it works both ways. For example, at DEC expiration max loss with no vol increase is $150. Focus on the % return for now and not the cash since this strategy is scalable for more contracts. But do not trade over your head. Finally, I think the key to this strategy is havng a diversified group of positions spread out so that you are not loaded up in one or dependent on one. One or two will produce nice returns, one or two will move no where and produce limted losses and the rest will fall in between depending on stock selection and IV changes. For example, as of Friday my RIMM had about a 10% return while others were flat or slightly down. It is too early to take profits or count losses but the different positions will hopefully produce net positive results if I have chosen correctly. Many of these stocks announce earnings in JAN or FEB and unfortunately most are not listing JAN or FEB months so I am going with MAR or APR. The vol spikes will not be as much but I am still expecting some overall vol shift higher. Moreover, I can roll the short DEC into JAN and FEB and actually use the vol spikes to sell more premium if I am still in the position, so either way the vol spike will be an asset to the position. Keep up the research and keep the positions 1 and 2 contracts for now to test or paper trade them.
Coach, Thank you for your response. It provides me a diversified porfolio. What is the proper term for such strategy ? Initially you use the term Ratio Calendar Diagonal, later you use Ratio Diagonal Calendar Spread, which one is more appropriate ?
For AAPL, the next earning announcement is on 18 Jan 2007, which is 2 days before the Jan option month expiration date. In this case, is it better to have the long leg in Jan or Apr contract month in your opinion ?
If you know for a fact that the earnings will be in JAN expiration then that is the month you want to be long. I chose APR to give me more time to play the directional side and to push up my vegas so even smaller moves in IV will help the position. When DEC expires, I can still add JAN positions to take advantage of IV spike. Whether short or long, you can use the IV spike to your advantage .
New Candidate DNA Vols are at lowest percentile but spike regularly at earnings. next should be scheduled for early JAN so looking at JAN/DEC diagonal ratio spread. Just in case earnings are not in time for the JAN cycle, I may do longs in MAR and JAN and shorts in DEC to cover the time frame for any vol increase as well as a move in either direction.