Firstly, I am an options newbie. Assuming I wanted to play volatility on the NFLX earnings release. So today during market hours.. I was considering buying the AUg 17.50 calls for $1 premium and buying the Aug 15.00 puts for $.65 premium. Basically I would be buying slightly out of the money options on both sides.. now what is this strategy called ( strangle??) Also is there a free program that would calculate my theoretical return.. assuming I would plug in a random number as to where I thought the stock might jump after earnings release. So for example now NFLX is trading at 18.70 in after hours.. what would be the exact return?? Any help from option pro's would be helpful..
Hey Trend Fader. You are correct, buying an out-of-the money call and put is a strangle. I wouldn't call this a volatility play. You are buying options at the peak of their expected volatility because of the news; earnings. You bought the correct month, you don't need additional time. "Is there a free program to calculate theoretical return?", yes, lots of them, Options Toolbox being one, but you need to make an assumption. Now that the news is out, will option volatility return to more "historical" levels? Where will the stock open tomorrow (I show it up an additional $0.75 from when you posted this)?. The "exact return" is a moving target, don't get hung up on that. The buyer of a strangle is expecting the unexpected. I would say up 4% today and up 12% after hours falls into this category. kny3
Hey Trend. Any pricing calculator will do the job. www.cboe.com , you can download or use it there. Download takes a while. It will ask you strike (you can enter 2 positions, I think), stock price, # of days till expiration (or click on Aug expiration), int rates (3%), dividends(0), and will then ask for what vol you want to use. I don't have tubes warmed up yet on my machine, so pick a lower vol, much lower. It will give you a theoretical price on each option and the total strangle. kny 3
I cant find the strategy calcualtor that will graph out the strangle to show the b/e and profit returns.
Can someone explain to me the proper mechanics of a strangle... any tips and what I should look for when playing earnings... Does this strategy usually work well for big earnings releases?
go to www.888options.com and order the Options Investigator software... Pretty cool software and also has tutorial stuff on options. Maybe it's downloadable. I got a new laptop from work and I don't have it installed, yet. From what I remember, I think you may have to do one leg at a time and just plug in the numbers on a spreadsheet to see how both positions add up. Good luck.
Spot-vols[realized] after the release need to exceed the drop in implied-vols, post-earnings. Empirically, IV drops in >90% of post-earnings trading. IOW, you need to see a lot of movement. Your b/e is a simple matter of strikes +/- premium. Straddles and strangles are very sensitive to changes in implied vols. No other position will react as violently to movement in vol -- the margin of error, edge gain or loss, is very small. Choosing straddles over strangles is a personal choice. The atm gamma is higher in the straddle, but the curvature peaks atm. You're +dgamma in a strangle, which allows some additional leverage should either strike be hit. If not, you're basically screwed.
I buy OTM stangles based on options with IV that are way under their mean IV for past year. It's been working pretty good so far for me.
Interesting, union. Do you have a option scanner service/software that finds these opportunities? Or is it from iv.com or Value Line? Could you post a few of your trades so we can get an idea of what you are looking at? Thanks for any info you can post! Regards. C