What are peoples thoughts on trading earnings on stocks were the atm straddle is clearly mispriced and shown a consistent short bias? ie. a stock where selling the atm straddle the day before earnings and buying the day after has been profitably 9-10 times in a row? Few thoughts, position sizing would be key. I'd probably trade a butterfly then short straddle, don't want unlimited risk. Doubt this would be viable on well known stocks, I'd assume the straddle would be fairly priced. Happy to hear negative comments too.
By what means are you going to identify straddles that are "clearly mispriced", and that are factoring in an earnings event that has no certainty of outcome? Doesn't sound like any fun to me!
You should trade anything where there is enough of a mispricing to give you a sufficient margin of safety in case you are wrong.
Butterfly would be very prudent for shorting. I have gotten my head handed to me a couple of times until i swore of short earnings straddles. Don't even use charting for a play like this. It's mostly statistical. Better have a secret sauce filter for the safe bets. As for long straddles, gains are consistent because the volatility crunch is consistent. However, the gains are small. You have to find a catalyst that can cause a savage breakout. What can you find that isn't priced into the implied? Difficult.
If you are buying wings for protection then you probably shouldn't be selling vol in the first place as most of the "volatility premium" is the value of that tail event.
I assume you are referring to a butterfly: Long 1, Short 2, Long 1 If so there is no alternative. If you want to sell options and collect a juice premium due to earnings the only way to protect yourself from a bigger than anticipated move is to buy the wings.
How would a calendar behave? Could you elaborate on the obvious Vega mismatch? For example, I have an ULTA MAR20/APR17 135 Calendar that has treaded water for 1 month. Every week, the model says I will bank 1000 bucks the following week. Unfortunatley, the rise in IV in the front month has prevented the accrual of any profits. I have half a mind to hold until after earnings to see how much to front month IV collapses. Kinda stupid, but I need to see the $change at times. I've bought 100 shares to account for my directional bias. Oops, did I swear on no short vol on earnings?
Thanks for the replies. Lindq - As i mentioned in my first post - I've found some companies were the sale of a straddle the day before earnings and purchase the day after has been profitable the last 8-10 earnings events. This to means that the MM's consistently over estimate the implied move in earnings. Assuming an upcoming earnings event, if the IV and the implied move in the straddle are relatively consistent with the previous earning periods, and it's a "normal" earnings report, would you agree that these companies could be considered to be be an opportunity? xandman - I agree that its definitely a statistical and direction neutral play. Would you mind going into further detail around the criteria you used to when you sold straddles into earnings? and more detail around your long straddles into earnings? from what I've seen for straddles into earnings, the majority of companies are either mainly a sale or mix of sale/purchase, not a purchase, so I find it interesting you say the gains are consistent. Would like to understand this further. newwurldmn - could you recommend a similar structure to a straddle but wouldn't be naked?
When IV implied move<3 Qtr ave move; Buy When IV implied move>3 Qtr ave move; Sell Just a basic idea, the but its not a profitable since it is very far from a complete strategy. I need to develop a secret sauce. Hint: exiting at the day after earnings, if you are long gamma, is a terrible waste of momentum. But if you can't make a profit at the most basic implementation. Should you pursue further? I don't know.