I don't delta hedge except for rolling a position higher or lower if it has more than 20% gain and 2 or more days till the event. It does not happen often. To summarize, this strategy constantly exposes one to positive randomness (gamma). It treads water if the market does not move but it really shines if the market moves big; especially to the down side. Example, most of my resent gains came in last two weeks of July when SPX swung 50 points up and down in the course of a few days. August has been a break-even so far.
Do you consistently buy straddles or is it once in a while? Are you saying that you buy straddles in non earnings situations as well? Spx isn't subject to the "implied vol balloon" coming from earnings. If anything it's subject to the vol slide making your effective theta higher.
I consistently buy pre-earnings straddles and sell them just before earnings. That exposes me to potentially large market moves that may have nothing to do with the underlying stocks yet those stocks will rise and fall with the overall market and straddles on these stocks will rise as well. I used SPX in my example as a reference point to the type of moves that are beneficial for the strategy. If SPX drops by 20 points a day IV rises for all put options, not just those linked to S&P 500.
Do you look at stuff like vega, theta, implied vol, etc to make your decisions? All I've been doing is comparing today's straddle price to the straddle price in the past quarter. Today I bought the CRM strangle for 16.00. I noticed that today's straddle was trading at a discount compared to the straddle price last quarter. I didn't compare the strangle, but I assume it has been selling at a discount as well.
I look at IV to see if it jumped already and if it did, I try to stay away from that position. Theta is misleading because it may be compensated by the rise of IV. Time to expiration is more important. Right now most of my candidates expire in September and that is a lot better than weeklies (HPQ, DELL, CRM). I also look at the price of a straddle/strangle comparing with the previous day. If I see a small (1%) change up of down I am inclined to buy it. If the change is big (say 10%) I pass. Did you buy weekly or monthly CRM strangle?
Why would you pay 16 for the sep when you can buy the aug weekly for 11.7. Breakeven is expected to be 7.3% in both cases but you don't have extra vega risk that you do in the sep.
CRM reports next week, on August 23rd. If you buy the weekly straddle, in my opinion, theta decay will eat at your profit. The september straddle will not decay as fast as the weekly straddle. I would buy weekly straddle only a day or two before earnings announcement to minimize theta decay.
Say your expectation is that this will move 7.2%.This is reasonable as it's consistent with history and it's what the weeklies are pricing and 95% of the weekly performance will come from the earnings announcement. Then you are paying 47 vol for the balance. There are some convexity adjustments that need to be made but 47 vol is pretty high when current realized is closer to 37. Your strangle should decay at 47 vol. Are you saying that it won't? Then you are saying that the market is under-estimating the implied move of the earnings right now. Which it could be.
How did you come up with 7.2%? Just to make sure we're on the same page: the position is to be sold BEFORE the announcement not after.
Quick question.How did you come up with the 7.2% move expectation? Did you average CRM's past earnings moves? I will tell you what I did. Last earnings, CRM's monthly straddle traded above $19++ prior to earnings announcement. This was when CRM was in the 130's. Today, the monthly straddle is trading in the 18's. Since I am at work, I could not see what the strangle traded at last earnings ( Can't use thinkorswim at work). I made the assumption that since the straddle is undervalued compared to last earnings, strangle may also be undervalued. Now, CRM moved only 8% last earnings, but it does have a history of making bigger moves. I did not look at CRM's historical vol last quarter. I am an amateur here. If you find a better way of valuing these straddles, I am all ears.