As of close today these are some numbers I come up with. ADBE at $220.00 Sell 220c at $5.00 Sell 220p at $5.75 Credit $10.75 Buy 230c at $1.53 Buy 210p at $2.15 Debit $3.68 TOTAL CREDIT $7.07 Maximum profit $700.00 Maximum loss $300.00 Commissions and bid/ask spread not included. EDIT: Those are for the March 16 options.
If you monitor IV, the general pattern is that it increases more dramatically in the two days before the EA. A small amount peak the day before. Some peak by early afternoon. Some peak in the last hour. Since I was looking for a specific ratio of near week IV to far week IV, once it got there, I watched it with a mental trailing stop. As long as it increased, I held off executing. If you're doing a coupla spreads, not a big deal if you get a nickle more or less, compared to the time involved. If there's more size, there's psychological comfort in a better fill ;->) With diagonalized positions, more often than not, I found that IV of the far week usually held up better than the near week. Both collapsed but the later week didn't bottom out as fast. IOW, salvage value was higher the next AM. For a same series IC, much ado about nothing. Getting deeper into the weeds, you can defend during after hours by taking a delta appropriate long or short share position if it's heading for a short strike. Great idea if it continues against you otherwise, not so much.
thanks, yes I'm seeing $898/352 for same now, with ADBE at 218.18. Would be interesting to see where I actually get filled. Looking at CTRP today and WSM, both after-hours EA plays. I've been looking at iron condors, but will consider iron flies as well. Your scenario puts the BEPs at around 211,229. Another option is IC 205/210/232.5/237.5 $144 credit/$356 max loss, BEP around 208.53, 233.98. The fly looks more attractive doesn't it? -Kev
I winded up setting up a WSM iron condor: 47.5/50/57.5/60. BEPs around 49/58.5, WSM trading at 53.7o on close. IV not ideal, will have to see how price looks in AM. -Kev
Is that the March 16 expiry? I assume it is. If WSM reaches one of the maximum loss points then obviously the best thing to do is to hang on for a possible reversal back towards $54.00ish.
What do you think of this concept? I'll just tell you while I find it interesting, the BPR is high and this runs counterintuitive to everything I am hearing... which is why I'm curious. https://theoptionprophet.com/blog/the-best-option-play-for-earnings -K
Conclusion "Stay away from short options during earnings. They seem like a good idea but have a negative return and you could blowout your portfolio. Long options, especially long straddles, are the way to trade earnings. Straddles allow you to take advantage of large moves in either direction which is a perfect for earnings. When selecting the stocks you want to play focus on the smaller stocks with less coverage. These make better candidates for surprises. To raise your probability of success even higher try to find mispricings in the straddles when compared over the last four earnings announcements." I think short options during earnings is a good play as long as you buy some insurance (make it a credit spread / iron condor). I also disagree with long straddles/strangles as being the way to trade earnings. They are too expensive and the underlying most likely will not move enough. You have to pick a direction and go with long Calls or Puts - not both.
As a general strategy, whether you buy or sell the straddle of a stock the day before earnings to buy/sell it the day after is just gambling. You are praying for a move larger than the straddle value or conversely a smaller move if you are short. Unless you have a crystal ball there is no real way of knowing either of these two facts will materialise. During the last earnings round for giggles I posted the proposal that we sell the AMZN, AAPL, GOOGL straddle with AAPL at a 10 times multiple. I think the 3 way straddle I proposed at the time was selling at 150$ - of course there were no takers. As it turns out and despite a massive move by AMZN you would have made a huge profit on that sold straddle (100$ or so). When NFLX was going to announce earnings, I was long an ATM call which I sold before earnings. The stock moved a lot but the volatility collapse was even greater so that whoever bought my long position had a 30% loser on his hands despite being directionally right. Statistically the volatility collapse overcomes the stock move the vast majority of times. The problem is that when it doesn't, the losses can wipe out your profits of dozens of other trades. Presuming you can find mispriced options is also a gamble (at best) or plain condescension towards the hundreds thousands professionals that look for such mini-differences for a living. Straddles are very expensive and you lose two ways when you hold them through earnings - one side will lose from the directional move (or absence thereof) and the both sides will lose from the volatility collapse. Furthermore trading costs add up when you choose stocks with cheaper options and risk is higher when you have stocks with very high volatility to start with. The simple observation that the priced in move (as suggested in the linked article) is lower than the average of the four previous moves makes no sense at all. For one the author averages both up and down moves and he looks at percentages rather than standard deviations which would normalise the post earnings move. What can sometimes be done is a detecting a pattern - I noted for one stock for example that - presuming normal results - it moved alternately possibly optimism Q1, disappointment in the middle, renewed hope in Q3 and dashed hopes on Q4. The key diffentiator is was - in my opinion - that in Q1 and Q3 the company gave outlooks which it didnt do in Q2 and Q4 - the management was always conservative. So there was a higher likelyhood of a better than expected result in Q2/Q4 announcements than there was in Q1/Q3. Such patterns are repeatable but can of course change the moment management changes the way it makes announcements. In my experience the only really reliable strategy is that volatility increases as the announcement date approaches. If you are not unlucky in your timing - and this is a big IF - you can make money by seeing the option price increase simply by getting close to the earnings date. Strategy is then to sell before earnings - this can work with straddles or long positions and its worth carefully checking individual stocks to see what happened in the past and why. Its still hit and miss 1 in 3 of these guesses is wrong and the losses are greater than the winners but overall at 2 wins to 1 loss you can get ahead if you know to cut your losses double quick.
I am having luck doing both: selling options that expire before earnings or at least reach my profit target shortly before earnings, and selling iron condors and other non-directional plays during earnings. I'm having hard time seeing how making the assumption that the rise in volatility before earnings announcement and subsequent contraction with estimation of price movement being somewhat rangebound is gambling but all the other assumptions we make is not. I have made I think two or three earnings plays this week and won all three. I get that I will lose one if I continue, but that pretty much characterizes my portfolio. Pardon my if I am wrong but finding misplaced options and finding an edge in an efficient market is the whole reason that non-professionals even trade and comment on an options forum on this site. I may have misunderstood you. I sold a strangle last night in ADBE for a credit of 7.00. The price gapped up 3.x% on open and then came down within my range and I bought back for 6.00. I paid ~ 4 dollars in commission total. I didn't like tying up that much capital frankly but during earnings season I plan to lie low and keep much of account in cash so no big deal. Having another chance I might choose the iron condor option due to improved pricing/risk. I get that some don't like earnings trades but it seems an interesting way to continue to remain engaged when other options may not exist. I have never made a single undefined risk play and my account currently consists of about 15-20 undefined risk, non-directional winners. Plus: it's fun and I do like to gamble occasionally as well! Cheers! -K PS: thanks for your comments. I have read every word of every one and appreciate the conversation.