Iceman I meant buying a naked put. Wouldn't his ROI be much greater than using any other option strategy ?
Generally, I try and capture the vol implosion. Also, rarely do I try and game direction although sometimes I can't resist. Earnings are a crapshoot most of the time. Even though I look at YHOO and see a stock where the market doesn't seem to anticipate a great quarter, there is always a chance I'm wrong. For example, two other net stocks, AMZN and EBAY, had blowouts and both ramped after their announcements. I was trying to game the AMZN earnings though. Unfortunately, that fucking company released their earnings before the option market closed. The ramp with only a few seconds before the market closed took out some open orders far away from where the stock went out at 1:00. I should say that even though I had on a bullish position for earnings(this the position I would have liked to have on if the orders weren't taken out), it was still hedged and positioned to capture the IV implosion. Sometimes there are opportunities to play direction for an earnings announcement. I find they are rare. Was Yahoo one of those? I'm not really sure. Like I said, it doesn't appear that the market was looking for a great number. I wouldn't have said the same about AMZN and EBay. The latter, while off its recent highs, was firm the previous couple of days going into the number while AMZN was appearing to try and break out. As a brief note, the way to capture the vol implosion is to spread one month against another. That is, sell the front month at say a 50 vol and buy a back month at 40. The front month implodes to 35 while the back only comes in a point or two. You make the difference. There is a lot more to it than that, but that is the general idea. If you really want to play direction by buying an option, I suggest looking at a back month. This presents different risks and potentially a bigger loss if wrong, but if you're right at least you know you'll make money.
Very interesting, thank you ! I will study your comments. I looked at greeks and all sort of options strategies early in my trading career, I came to the conclusion that for me a net option buyer, it really didn't make a difference how much I knew about greeks, vol, etc.....of a specific contract. As an option buyer I only buy DITM, looking for cheap time, trying if possible to spend 0.30 per month on average or less. So chances are I will not be buying any of your options, if you are selling time. I am reading Natenbergs book on pricing and volatility, very interesting, but my strategy (so far) is based solely on picking the most grotesque MACD divergences in the market. Do you believe that having to choose between two trades, is knowing the vol or delta or gamma give me better odds if what I am looking for, is for price to move based on what the chart is telling me anyways? Thanks !!
If you're trading DITM, then it really doesn't matter as just like you say there isn't much time premium anyways. DITMs should be looked at like stock. As a retail trader, I often used them to free up capital or to put on a larger position than I normally would have. So, it's possible I might sell a DITM. Honestly, I wouldn't be too concerned with the greeks either at that point. Now, if you were trading atm or otm, I would say that you should look at the greeks and options values the next day after the vol implosion. This is how I model my positions. Like I said, most of the time I don't really care where the stock is going the next day. I just want my position to be profitable no matter where it goes within some reasonable range, min of 10% to 20% with the possibility of only a small loss beyond that. So, I know exactly what my deltas are and what the P&L is going to be at various stock prices. To find where the vol implosion might take IVs, look at ivolatility.com and see where the recent minimums of IV have been. More often than not they'll hit the lowest part of that range. Do you ever buy a DITM and then sell an otm against it? or does this just limit profit and doesn't really help? A lot of times a 10% otm option still has decent value before an earnings announcement.
Thank you for the link and your reply. I have learned to not play EAs. I haven't considered selling options against my long positions. I don't have the discipline required to babysit positions everyday, that is probably why I think long options are so much safer. I am either right or wrong...but will look into it and see how my p/l would be affected. As food for thought, I am thinking about opening a large short position in IYE sometime this week. From your perspective do your numbers agree, (greeks, vol, etc.) with a short position? My charts are telling me is a go....once QM breaks.