Percent drop would vary across strikes and expiries but percent is meaningless. It's a Pyrrhic Victory to make 95% of 20 cents and lose 50% of a dollar. GLMD is up $11 to $18 this morning from an FDA approval. I was hoping that it offered options to demonstrate this but it doesn't. Perhaps another day, another approval. Here's a made up example with its B/S price output. XYZ is $100, IV is 80 and the 1 week/2 week ATM short call calendar offers a theoretical $1.85 credit if IV is the same for both weeks ($6.28 - $4.43). The next day, FDA denial. Stock drops to $90 and IV drops to 40. Respective options drop to $0.06 and $0.31 for a debit cost of $0.25 to close the spread (ignoring B/A spread slippage to enter and exit). To demonstrate the high risk of a short calendar position in such circumstances, suppose the decision is delayed. Stock price and IV are unchanged at near week expiration one week later. The one week call is worthless (down $4.43) and the the two week call is now worth $4.43 (only up $1.85). Not pretty.
That sounds good on paper but in practical terms, it's a fool's errand to buy an expensive straddle that's going to lose 75% of its value overnight due to IV contraction. Binary events are unpredictable and expecting the move to be more than enough to make up for that high debit paid is more like hope. It's a bad bet. EDIT: Average IV for PTLA on May 3rd was over 180. It was likely to have been much higher for the near month options. After the FDA announcement, the next day it was down to 55. Bad bet to buy 180+ IV, regardless of the underlying's move.
For PTLA, July was not listed yet on May 3rd, but the September 35 calls where priced at a vol of about 100 vs June 35 calls pricing at 160 vol. So the implied move was priced about double of what it realized (52% vs 25%), but the ambient vol was priced to perfection at 55. If you would have sold a calendar, you would still lose money - outright vs delta you’d lost 3.50 or so, while in a short calendar you’d have lost 1.2 but your gamma would have been much lower. Trading events is hard like that
First off, the PTLA example was in response to the claim that buying a straddle before a 180 to 55 IV contraction might be sensible. I have no idea if the short calendar would make sense because one has to see premiums and I don't have access to historical option data. Be that as it may, why are you looking for a July expiration as well as the Sep options? The front two months would have been May and June. What were the premiums for them, not the IV or percent change?
Well, I was in a doctors office and was bored so I looked it up on my cell was merely curious what magnitude was priced in for the event (over 50% vs the actual realization of 25%) and how well that worked out. I don't play single name events any more, but my prior is that pharma events are, in general, overpriced. However it's possible to imagine a situation when buying a straddle would make sense regardless of the subsequent implied vol contraction. At extreme, it would be sensible if you think there could be a move that will take your strike to low enough vega. For some reason, May expiration would not come up on my Bloomberg app, while June and Sep did. It's a conspiracy that I was not willing to fight against. I don't recall now, I think June was 6.5 or something like that and I can't recall Sep at all. Do you mind elaborating why do you feel that it is better to look at prices instead of implied vols?
Calendar trade today: NFLX June 29/July 6 382.5 for 1.20. The forward vol for these strikes is 23.9%. Got filled at 1.25. This is very low when I compare the past IV/FV.
TSLA also has a big show coming up in Frankfurt July 21. They will showcasing there new model. Jul 13/27. Looks like a good calendar here. Implied forward vol is 42%. I will be putting an offer in tommorrow
Anything is possible. But is it practical? I think not. If you believe otherwise, we agree to disagree. The short answer is that in this particular case, if a binary event is going to drive premium down and possibly toward parity, it doesn't matter what the vols are. All that matters is that you're selling more premium than you buy, and if your wish comes true, you capture some or all of the spread I can't give you a one size fits all answer because with each set up, time until expiration varies, and IV varies across time and price. So let's go with what elitenapper asked me: "What would be the percentage in drop in options prices for an IV collapse from say 80 to 40, or from 50 to 30? Would that vary across strike prices or expiry dates?" In order to give provide something more concrete than mere words, I crafted a hypothetical position where the IV across both weeks was identical (not gonna happen in the real world) and modeled some numbers. As posted above: XYZ is $100, IV is 80 and the 1 week/2 week ATM short call calendar offers a theoretical $1.85 credit if IV is the same for both weeks ($6.28 - $4.43). The next day, FDA denial. Stock drops to $90 and IV drops to 40. Respective options drop to $0.06 and $0.31 for a debit cost of $0.25 to close the spread (ignoring B/A spread slippage to enter and exit). Increase in the far week IV creates more TP, inflating the credit . Near week IV is going implode but dollar change is the focus not pct IV change. All that matters is the quantitative premium change in each. Yes, the example is hypothetical. At this point, all I can suggest is that the next time there's a binary event looming, look at the numbers and if week two's expiration IV has also expanded severely, look at the possibility of the reverse calendar. The numbers may line up nicely, they may not. I did some of these in the days of trading single name events All worked in varying degree but yes, they were a finite sample done with pin money. It's not like there's an FDA announcement every week nor would I bet the farm on it.
@spindr0, I think I missed the original conversation so my comments were out of context somewhat. Think of it this way. A calendar straddling the event is a view on the relationship between the event and the ambient volatility. In a root-time flat form, your are exchanging the event gamma for ambient Vega. Alternatively, you can structure on a ratio, gamma (or ultimately premium if you expect an extreme move) flat which makes it more of an outright forward vol trade. For example, if you think the event is fairly priced but the ambient vol is rich, you would oversell the far expiration.
Every time I thought I found a calendar position with edge, all the profit was offset during execution by a very wide bid/ask spread.