The calendar spread

Discussion in 'Options' started by TheBigShort, Jun 7, 2018.

  1. TheBigShort

    TheBigShort

    The "directional" trader 100% cares about IV. How is he supposed to measure his risk reward??? Let's say the "directional" trader is expecting a 10 point move in the stock. Implied vol is pricing in a 8 point move. What happens when he is wrong? Where will the straddle be after earnings announcement?? Let's break this down for you.

    Trade A:
    Implied vol is 200% and is expected to go to 10% after earnings announcement. The 200% Implied vol is pricing in a $8 move. The directional trader thinks the stock will move $10. He buys the straddle. If he is wrong he loses almost the whole premium payed because the IV will go from 200% to 10%. Therefore his risk reward is make 2 to lose 8.

    Trade B:
    Iv Is 50% and implied vol is expected to move to 40% after earnings. The stock is pricing in an $8 move and the trader thinks it will move $10. If he is wrong he only loses 10% of IV on his straddle when he is wrong.

    Who was the one who told you it was directional
     
    #51     Jun 15, 2018


  2. He doesn't give a rat's ass about IV - his focus is direction of the underlying.



    I think his name was Ken or maybe Kevin.
     
    #52     Jun 15, 2018
  3. TheBigShort

    TheBigShort

    I'm just trying to help you out here bud. You need to care about IV when you are trading options. Because you are not ALWAYS right on direction so you need to know what happens when your wrong.
     
    #53     Jun 15, 2018
  4. srinir

    srinir

    Don't sully the name of Kevin. If you want trade pure directional bet, then trade the underlying. If you are expressing any views using options, then you are trading vol.
     
    #54     Jun 15, 2018

    • The directional strangle/straddle option trader is 100% aware of what happens if he is wrong.
    • He his prepared to lose all of the debit paid for the position - that is his stop.
    • The collapse of IV after earnings is no mystery.
     
    #55     Jun 15, 2018
  5. TheBigShort

    TheBigShort

    Here is a simple way to see how YOU care about IV. If the options are priced to much you won't take the trade. Which means if IV is to high you won't take the trade. It's such a simple concept I'm not to sure why you are arguing about it. That's fine that you use options to capitalize on the direction of a stock. But just know that you are trading volatility with a directional bias
     
    #56     Jun 15, 2018
  6. spindr0

    spindr0

    All I have to offer you at this point is an eye roll for believing that IV is irrelevant for a long straddle when IV is going to crash from 100 to 20 overnight (eg. FDA announcement) and the value of the straddle is going to drop 75% from that contraction. It is far from irrelevant.
     
    #57     Jun 16, 2018
  7. spindr0

    spindr0

    Stating common knowledge does not change the fact that buying exorbitantly inflating IV is swimming upstream. As a general rule, it's a really bad game plan.
     
    #58     Jun 16, 2018
  8. oldmonk

    oldmonk

    So I came across the following calendar spread strategy based around earnings - Short the month (or week) just prior to earnings, and long the expiry immediately after. The idea is that the short month's vol remains relatively unchanged, while the long month benefits from rising vol as we approach earnings. The trade would be closed out before the short expires. What's wrong with this strategy?
     
    #59     Jul 20, 2018
  9. TheBigShort

    TheBigShort

    This is called being long the jump. This strategy will lose money if the jump is over priced. The strategy is also short gamma and will lose money if the realized vol is greater than the ambient vol.
     
    #60     Jul 20, 2018