That makes sense too. They could then probably be used during earning's releases and for directional bets.
Earnings will be priced correctly generally (unless there is some whacky information you might know about - but that will generally either be false or tread some grey area (in the best case)). You can always trade on direction. Will you have an edge in HPQ over the overall market? If you are a small account (< 10MM) you should look at the less liquid options. You can find some real interesting opportunities there even crossing 15 cent bid offers. Illiquid options don't always mean illiquid underlyings. EDIT: Not to sound like a cock by saying < 10MM is a small account, but I mean that a 10MM vol account can more or less trade anything. If you are a 50MM vol account liquidity becomes more of an issue at least in single stock equity options.
Precisely because they're well priced, Fly's or even ICs to capture falling IV would help during an earnings announcement, no? I mean, I would assume the market makers would price the ATM straddles in a way that any expected move is more than compensated for with the premiums. Even with an IC- with the wings eating up some profits, AAPL and PCLN recently gave some healthy returns. I only got into the AAPL earnings though back in Jan. And yeah, more often than not getting good fills (especially on a vertical) is easier with illiquid options- the bid-ask spreads really help you there. EDIT: What is an HPQ? HPQ is HP's ticker- is that what you were referring to?
I forgot about AAPL, PCLN worked if you shorted the earnings vol, HPQ worked if you were long the earnings vol. The idea that vol coming in after earnings is a buffer is retarded and uninformed. The vol coming in is really extra theta you are paying for a larger expected move. If you bought a typical stock 3 weeks before earnings. On the day before earnings vol will be a lot higher but you won't have made any money. If you are selling Iron Condors (that is selling the body) then you are selling earnings vol. In HPQ it didn't work (not a winner for me). In PCLN it would have. But these names tend to be priced fairly because earnings information is widely followed and market makers have lots of feedback (trades) to mark their positions. You want mispricings. There are hedgefunds who only trade illiquid options and they generate high returns (on small asset bases like I mentioned above). hpq is hewlett packard.
I've never tried that because you'd need to be right about direction no matter how much the vol rises. In terms of mispricings, did you mean their expected moves during expiration is mispriced or the option values themselves being mispriced? The latter would be quite hard to exploit IMHO. As for the former, the mispricing could seriously work against you if the underlying just decides to sit if you're long a straddle or vice versa if it explodes one way and you're short the straddles... Tricky, this earnings business. Very tricky.
Mispricing of the options IS mispricing of the expected moves, since value of the option is dicatated by the implied volatility (which is the mean expectation of the moves). The idea of every earnings trade is to find stocks that have these expectations mispriced, either vs history or vs your subjective interpretation. My experience has been that illiquid single stock vol is a better buy, especially around events especially if you have done your homework either via screens or by developing intimate knowledge of the underlying company.
You can buy straddles delta neutral. Ditto what Sle said. At the end of the day any trade is a horse race. You select which odds the market is mispricing based on your own analysis and then see what happens but you can still be wrong even if all your analysis is right. Your PCLN call is an example. Earnings as a basket aren't any trickier than other vol. The one advantage is that the pnl volatility allows you to trade fewer options meaning less tranaction costs relative to potential gain/loss.
Sonoma, you are most likely not gonna find a whole lot of satisfactory answers. Those who run a profitable business are most likely not gonna share what makes them money. You could attempt to ask Atticus & Co. on the options front, I believe he is a solid trader but I would not expect more than canned answers. I trade high frequency foreign exchange through several execution gateways. I am scared to hell right now because I am absolutely certain that it will not take long before all the equity hft firms will crowd the fx space because regulators will squeeze the equity space really good. You made a good point re your randomization of time series and your questions why S&R is any better than other indicators. My take of this is: It is not any better at all for random time series. On stock price series or other asset time series you need to thoroughly test which indicators/filters work well for you. Some work better than others but one thing I can guarantee you. Nothing works all the time, which leads me to tell you the bitter truth: 1) There are people in hft space for a good reason. There are still semi-free lunches to be had. Its getting a lot harder these days but the risk reward profile in my opinion looks the absolutely best in hft space, no question (unless you are member of the Swiss National Bank can can squeeze in couple of your own trades for your PA without detection....). Sharpe ratios tend to be the highest in hft space. 2) Fundamental macro approach with technical overlay. You get a sense when bullishness/bearishness exhausts itself to time your approximate entries. If all the good/bad news is out and markets do not respond to more good/bad news anymore in positive correlation with the news then this is tells you something. You then look to build a position by utilizing technical indicators such as support and resistance. If you sensed last week that all good news was already out and that markets just could not be carried higher anymore that was a good time to start looking at technical indicators (I am not talking about RSI and all that other bollocks). Your bias is obviously on the short side and you then want to sell into short term reversals to the upside as long as such reversals do not violate the beginning down trend. It sounds simplistic and in effect takes years of practice to master it, but thats I think how a lot of the huge hedge funds hit it big. They may only make 4-5 trades per year off the back of such turning points but they bet big and I think thats the right approach. 3) Arbitrage/ Market Inefficiencies, under which I include vol trading as well. Anything that is not directional. It gets more technical in this space and you should be realistic that you are not gonna hit it big as a bloody beginner against seasoned traders with years of experience in this field. Either start small or enter this field while you have a full time job or profitably trade other strategies unless you are able to rely on a comfortable nest egg for a prolonged period of time. Believe me, whatever others say: Almost all those pair trading "gurus" here at ET or elsewhere hardly make a dime if at all. To profitably trade statistical arbitrage you need a lot more than an understanding of co integration, Granger causality, and throwing a bit of the Johansen test for cointegration in (which is actually a really weak test for cointegration and quite dated as well). Most of the guys here at ET who claim to trade pairs have close to zero understanding of the underlying statistical methods but rather click buttons on an application that is sold for couple bucks and promises the road to riches. I sensed from your posts you are smarter than believing in such simplistic ways. 4) Everything else not mentioned above is SNAKE OIL. Believe me (or don't and pay dearly for it). Forget any standard indicators that you can read about on Investopedia and such. Forget daytrading without an absolutely solid approach to risk management and an EDGE. I have not found such edge purely by implementing indicators/filters and the like in mid frequency space. The time series are still way too noisy and you are absolutely right: There is no single reason in this world why the market should respect certain MACD, RSI, Bollinger, what have you levels. IT SIMPLY DOES NOT. Sometimes it works (out of pure chance) sometimes it does not. The main problem is the changing market dynamics will not allow you utilize any such indicators or filters because most of them are static and not calibrated to changes in market dynamics. Regime switching strategies are an entirely different game and the math and stats under the hood is way beyond the comprehension level of your average "day trader" here at ET. There will be many who disagree with me, but I have seen enough in 20 years of trading, of which I traded 12 years professionally on the sell side for various prop groups and on the hedge fund side as well and I started my own hft firm. Let me tell you that you better take every claim of performance with a huge grain of salt. You may have noticed that I did not make a claim of my performance and I won't because I have nothing to sell and other than that it is nobody's business. Do not believe any of those snake oil salesmen, trust me, you gotta do your own research and first understand what general approach to trading you are most comfortable with and what your mathematical and statistical skills are like in order to decide what approach to go with. This was the brutal truth which you will not hear too often. Nothing ekse works in my humble opinion than 1) a combination of fundamental/technical aspects and a deep understanding of mass psychology and years of experience, 2) arbitrage strategies, that seek market inefficiencies as well as volatility trading strategies which both necessitates a deep understanding of the dynamics of the respective asset classes and comprehension of the underlying theoretical framework, 3) hft strategies, or strategies that benefit from market psychology -> basically the masses wanting in and out at inefficient levels and such liquidity is provided to them at a small cost. I do not believe anything else works. Its my own take, it is based on my 2 decades in the market and I have no issue others disagree with me. I will not engage in any fights, arguments, or objections of my take because I believe in my opinion voiced above and am not willing to change it because it has served me very well over the years. Hope it adds a little of value to your considerations!!! Good luck in your journey and hunt for inefficiencies. Just remember: Good things NEVER come easy!!!