These earnings butterfly strategies are dangerous. I did my last one yesterday. It works for a while, but the problem is when you lose money, you lose big. However, do you agree that the pre-earnings straddle strategy works? If you find a stock that is highly volatile (FB, LNKD, GRPN), the straddle value seems to go up as earnings announcement approaches. It is better to avoid stocks like CSCO (which does move big after earnings) since stocks like these have major market-maker competition. But it seems like if you buy straddle on high flyers with less market-maker competition and sell them BEFORE earnings, you will make money most of the time.
It's possible, but it shouldn't be. Earnings are one of the most anticipated events that market makers and other vol traders look at. They price this stuff months in advance. I haven't looked at those types of names specifically but I have looked at the strategy as a whole and it doesn't really work.
It does work. However, the primary reason for the straddle/strangle price increase is a pre-earnings stock move. IV rise is usually not the case although it plays role for certain stocks (e.g. AMZN, GRPN, DNDN). Generally speaking, IV increase provides support for the position while gamma is responsible for the overall move.
They don't seem to be too good at pricing high vol stocks like linkedin. It absolutely does not work on a company like MSFT which hardly moves after earnings announcement. As far as hedging delta, you need to be delta neutral when you buy your straddle. After that, you hope for the stock to move in either direction.
So you don't delta hedge? Then you just care where spot is just before earnings? I might be wrong on the big move stocks. I'll look into this.
i get what all of your guys are saying... but because of all the speculative position taking before earnings prices swing due to the constant delta hedging of market makers.. thats just my speculation i invite you to correct me.. but i think what i was trying to say is exactly what Racoon said.. your bascically exposing yourself to gamma via the way the volatility holds your delta kinda static in relation to your theta.. does that make sense???
if your delta is static then you have no gamma. secondly delta and theta aren't really related except in some wing situations. Finally for ATM options, volatility has no impact on delta.
the what i said wasn't stated correclty... what i was trying to say was the projected move/implied volatility of the options hold off the loss from time and you can expose yourself to gamma that way... . i read what i wrote earlier and it does not make any sense haha.. your long delta and gamma.. or short theta and vega..
you know and the only real strategy that really interests me at earnings.. is playing the bomb drop.. deep otm puts on a momentum stock disaster..