Strangles and Earnings

Discussion in 'Options' started by kalikahuna, Jun 19, 2006.

  1. Hey guys,

    So, I'm very new to options trading. I've read "Options as Strategic Investments" and "The Bible of Options Trading".

    So, I've been looking into Strangles and Straddles and I have a question: How often stocks that have been trading tightly with low volatility right before earning reports really jump into profitable positions right after earning reports?-"a strategy suggested by Bible of Option Trading"

    have any of you had consistent success with this strategy?
  2. I'm in no way an expert in options but I do have some experience with strangles/straddles before earnings.
    Yeah, sometimes they workout real nice...but when the stock does nothing and/or the IV's implode it gets ugly quick.

    You really want to have a very good understanding on how to offset positions and just have a VERY GOOD understanding of options.

    Otherwise it's just gambling.

    Other people will be able to give you much better advice.
  3. Sign up to this site and start a favorites list, maybe the nasdaq 100 to start for educational purposes. Compare the IV & HV chart to the stock chart for past and current events to gain experience.
  4. so can tell me what the IVs and options price changes were for a stock before and after a bunch of previous earnings report releases?

    Also, I was wondering if anyone has tried taking long call/put positions based on MACD trends, ie. buy a ITM call when it crosss 0 going up and buying ITM put when it crosses 0 going down. This idea seems good for at least a quick 1-4 days trending in the right direction. Although, I know a lot of experienced guys will be burn me on this board about how IV could drop and the contract could lose money even if it trends in your desired direction. Has anyone tried this also with consistent success?

    I tried a few on virtual trading on optionsxpress and they seemed to work out ok
  5. I won't comment on the strategy per se but I will suggest that the best use of The Bible of Options Strategies is probably a door stop IMHO!

    It is full of filler, occasional mis-information and provides no real insight or value over and above what can readily be found online at a dozen places. At best, it's a hard copy catalog of "strategy" names.

    I suspect Guy Cohen just produced it to help push sales for his website products and capitalize on the success of his earlier entry-level book: Options made Easy

    2c :)


  6. Thanks for the advice, does that mean, when McMillan and Cohen are in disagreement over a point, one should believe McMillan or ignore both of them?
  7. It means that you should use your brain.

    THINK for a moment and go over the reasoning that each person offers. Learning to think analytically about a problem is your best weapon. But you won't ever develop that skill unless you make a habit of trying to work it out for yourself.

    In my experience, McMillan has never failed to "Think" things out properly. Generally he offers supporting evidence or material that makes his assertions understandable even to a newbie.

    Good luck,
  8. 4re


    Hey Guys,
    I have traded options for quite some time. I only use strangles and straddles as my method. I would say the answer to this is yes and no. Or more accurately it depends on the stock you choose. You have to understand that when using this method it is going to take a larger move either way to put you in a profit mode. Most stocks right after earnings will move and sometimes continue to move pretty good for a couple of days before leveling off. Will it be enough? No telling, it is a crap shoot. The use of strangles and straddles does work very well if given enough time. I usually buy 5 or 6 month out options. This gives me enough time to possibly get 2 - 3 positions put on during a trade.

    Now as far as selecting a stock to trade like this, you have to be very choosy. First I look through a lot of stocks with Bollinger Bands. Find as many as you can where the BB's are getting very tight. This means an explosive move is coming soon. Then out of all those that have tight BB's look back a couple of years and see if which ones of those seem to have a lot of range in their movements. Take the remaining good stocks and begin analysing to see which options are the most fairly priced. By this time you should just be left with a coouple stocks. Then you select the best one for you to work with. If 6 month options have a good price take them, that way you don't have to worry about time decay. This is the cliff note version of how I do my straddles and strangles. Hope this helps you some.

  9. Thank you everyone for the excellent advice...hopefully as i study more and try some of these trades (with or without real money) I'll be able to offer good advice too in the future.
  10. MTE


    A straddle/strangle is basically a bet that the realized volatility will be greater than implied, or, in other words, that the market has mispriced the straddle/strangle.
    #10     Jun 20, 2006