Overnight Strategy for surprise events (ER's etc.)

Discussion in 'Options' started by mutluit, Nov 3, 2012.

  1. mutluit

    mutluit

    I'm just playing around some constructs, ie. at the moment it's just some theoretical work.
     
    #11     Nov 3, 2012
  2. mutluit

    mutluit

    Yeah, sort of... :)

    Nay
     
    #12     Nov 3, 2012
  3. mutluit

    mutluit

    But: the rise of the IV means that all options that were bought before will gain in their premiums.
    So, conclusion is: the market makers cannot artifically increase the IV that much...
    Isn't it?

    Example: premiums (theoretical prices) of a 20% vola option and of a 30% vola option:

    Spot=100 Strike=100 ExpDays=40 IRpct=0.5% VolaPct=20% --> Call=3.210150 Put=3.131129
    Spot=100 Strike=100 ExpDays=40 IRpct=0.5% VolaPct=30% --> Call=4.793769 Put=4.714749

    That's:
    C increase = 49%
    P increase = 50%
    :)

    So, if volatility rises, then both Calls and Puts become more expensive, so people who bought earlier will profit from the increase of the IV... Therefore MMs cannot increase the IV as they would like to, IMO...

    ...and that means the strategy could indeed work...
     
    #13     Nov 4, 2012
  4. kapw7

    kapw7

    That's true but as I said in the previous post you have to account for the time decay before the IV gain.
    If you buy the option at 20% vol and it stays at 20% for 38 wdays and then jumps* to 60% and you sell it: will you make a profit or not? (I don't know the answer but you can play with realistic numbers and see how the P/L changes.
    If you try to avoid time decay and buy the option 5 days before earnings then most likely the price will be already high.

    Again that's not to say that it's impossible to make a profit.

    Also I repeat that my posts are only for the sake of discussion from the point of view of a student not an expert.

    *I guess a jump is not very realistic before earnings but it's simpler as an example. You can probably model a more realistic gradual increase in vol and check the P/L
     
    #14     Nov 4, 2012
  5. mutluit

    mutluit

    Preliminary calculations show that one then gets even much better results!... :D
    Tested buying 2 weeks before the ER at vola=20% and taking >20% at ER date; 60% IV seems to give even exorbitant profits! :D

    Will recheck the calcs and then post the result here soon...

    Here's just one of the "least profitables" :)
    for vola increase from 20% to 30% within 10 trading days, ie. 2 weeks (the more the IV increase the more exorbitanter the results become):
    Code:
      10.00  110.00:   701.87
       9.00  109.00:   611.19
       8.00  108.00:   528.78
       7.00  107.00:   454.69
       6.00  106.00:   388.98
       5.00  105.00:   331.67
       4.00  104.00:   282.76
       3.00  103.00:   242.26
       2.00  102.00:   210.14
       1.00  101.00:   186.42
       0.00  100.00:   171.10
      -1.00   99.00:   164.22
      -2.00   98.00:   165.85
      -3.00   97.00:   176.08
      -4.00   96.00:   195.03
      -5.00   95.00:   222.86
      -6.00   94.00:   259.74
      -7.00   93.00:   305.87
      -8.00   92.00:   361.47
      -9.00   91.00:   426.74
     -10.00   90.00:   501.85
    
     
    #15     Nov 4, 2012
  6. mutluit

    mutluit

    I rechecked the calculations and couldn't find anything wrong.

    My conclusion:
    the increase of IV is obviously an advantage for the options holder,
    and usually its added value overweighs multiple times the value loss caused by time decay.
    This is based on calculations with 2 month options.
     
    #16     Nov 4, 2012