Question for the option traders

Discussion in 'Options' started by sksyen, Jan 24, 2013.

  1. sksyen

    sksyen

    Quick question for the option traders here - I was looking at the overnight move in Netflix and was curious as to what would have happened if I bought lets say $5k worth of weekly calls and puts at the same time yesterday prior to the announcement. Technically, I would have lost 90% of the puts but made well over 2,000% on the calls. Wouldn't this be a sensible trade during earnings?
     
  2. A purchase of both a call and a put (typically ATM) is called a straddle. When you are long a straddle you want the underlying stock to move a large amount. So yes, if you bought a straddle yesterday in NFLX it would be a winner today. The rub is identifying whether the stock will move enough to make the straddle purchase a profitable trade, prior to the move happening of course.
     
  3. metameta

    metameta

    its called buying the straddle. if realized volatility exceeds implied you win either up or down, if it doesn't you don't.

    realized vol really outdid implied on the calls it helps to have 25% of the float short too.
     
  4. Confirmation of the obvious.....You'll tend to have frequent losses and infrequent "large" profits when doing that type of trade. :cool:
     
  5. Mitch89

    Mitch89

    You may win a few, but eventually lose a LOT.
     
  6. Pekelo

    Pekelo

    Long time ago, in a galaxy far, far away, I used to use this strategy. The stock had to move about 7-8% to move one side at least 100% (thus at least breakeven for the strategy) if I remember well.

    So as long as you can pick stocks that move a min. of 7% after earnings, and can get the options relative cheap, before IV goes up, yes, you have a viable strategy...

    Even better strategy if you flip a coin and you only buy one side. It wins about 50% of the time...
     
  7. metameta

    metameta

    that's the way it works, i sell puts almost exclusively and win on over 90% of them and then the 10% go to work on my pnl.

    i was short -$600 worth of dotm (at the time) hlf puts which then were worth -$12,000 in less than 3 days (oh f*ck). closed 70% at breakeven in early jan as stock fully recovered. still short a few around the $20 strikes and still down a little (less than $500) on those even with the stock at double my strikes (implied vol is 2x to 3x higher than pre-ack-attack).

    i'm holding because i believe odds of ftc shutdown is less than 10%.

    if i lose 100% of notational (stock at zero, put to me at $20) it would only blowout 3% of my account so i'm not losing any sleep as i was in late december.

    that and i'm up $45k in one month helps too (65% realized closing down the rest this week).

    hlf was a hella wake up call reminded me of being short puts in aug 2011 but that was worst cause everything was down, not just a single position.

    you gotta takes the punches if you want to enjoy the steady decay of theta its that 10% that gets you...
     

  8. 7% isn't some fixed rule.

    If GMCR moves 7%, you'll be hosed. If JNJ moves 7%, you'll be happy.
     
  9. Pekelo

    Pekelo

    I know, this was 5-6 years ago...

    But OP can choose a few stocks that almost always move 8-10% after earnings to increase his chances....