Discussion in 'Options' started by dupaski76, Jun 25, 2006.

  1. I've been looking at some of the past threads on straddles and it got me thinking of how to play starddles. I'm new to options as a whole ( about ten months now) and am looking for some honest and frank feedback on my take on this. Be brutally honest as thats how I learn =)

    Instead of playing the underlying for a move it seems that it might make sense to play the volatility instead. Looking at several charts I've found a stock that has moved around quite a bit after earnings for the past 4 quarters. Next earnings is due in 4 weeks and the IV on the ATM options are close to the historical mean ( thay are about half way between the mean and 1 Standard Deveation).

    If I were to buy the ATM straddle now there is a high probability that volatility will increase as we lead up to earnings. My plan is to sell the position 1 day before earnings are announced.

    I'm unsure what option to use as time decay will be largest for the front two months. What am I perhaps not accounting considering that I should be ?
  2. MTE


    You're right, time decay is a big hurdle and if you go further out in time to mitigate time decay then the problem is that the volatility of the back months doesn't rise as much, sometimes not at all, going into earnings so you won't be able to caputre that spike. It is the front month options that get the biggest IV spike. There's no easy way to trade these. Trade and learn.
  3. If front month vols will spike , back month vols will spike too. Always.
  4. MTE


    OK, but not as much.
  5. How much less does the IV move for further out options? Is the extra time factored in and assumptions that the IV will eventually revert to it's mean?
  6. its depends of how many days left to expirations (on the day of report). Lesser days=larger spike in vols. Vols do revert to its mean after report , but with the big ABS move in the spot this fact becomes irrelevant. As MTE stated before , its not as simple as its looks.