earnings trades

[jim leahy]

i do lots of options trades on earnings. the trade i do most often is a weekly put diagonal, sell the week of earnings
and buy the following week,lower strike. the analysis tools say this is a positive vega trade but it's really not.
the front week iv drops much more than the back week. the trick is to enter the trade for a credit so there's no
upside risk. the dollar returns, per lot, aren't high but the win rate is. you can dial your risk by the strike selection
and spread width. i always make sure that after modeling the iv crush on both strikes that the break-even
is below or at the expected move. what other trades are people using?

 

[status1]

Do you have a sample trade that you can share ? These options are you trading them naked or are you using spreads ?
How do you model the iv crush on both sides ?
What happens if the move is bigger than expected ?

A lot of the earnings come out after the market is closed ? What happens if the stock gaps against your position ?

Since this big move up and low vol in SPX I am a little hesitant to place put credit spreads so I am working on a new strategy in SPX
Something that I can place closer but with some protection that includes diagonals

 

[jim leahy]

this is an earnings trade in ntap. they had earnings the after market close and it's not good.
this is going to gap down tomorrow on the open and will be a challenge. the short expires
friday and the long on the 22nd. these are all defined spreads. the expected move is +-5.6
and my estimate of the vol crush is down to 40 from 68. if the stock falls below the expected
move this will be a loss but the iv won't drop as much as my assumption so it's difficult to
predict the loss amount. if this goes to a big loss in the morning i'll roll the short out to next week and
turn this into a credit spread. i'll get some credit for the short which will reduce my max loss.
if it's only a small loss i'll close it and move on.

i have proprietary software to model the iv crush but you can also do this on the thinkorswim
platform. you have to modify the iv separately on th eshort and long because the short will
decrease much more than the long.

these trades don't work the same way on spx because there's not a vol crush and there's
not the huge vol difference between the short and long.

 

[jim leahy]

this one didn't turn out very good. ntap opened down greater than the expected move but started to recover.
at one point this trade was down over $50 per one-lot. the vol came in more than i predicted so that brought the
expiration curve came down lower than my model predicted. note how much lower the after-earnings expiration
graph is than before earnings. this is typical of this kind of trade. that's why proper estimation of the volatility
crush and modeling it is so important. this trade still has another day till the short expires but i don't usually
hold on to earnings trades. the image below is the closed trade. ntap continued to recover and i could have
gotten out for a lower loss if i had waited but it could have also gone back down.

 

[status1]

Thanks for sharing the trade
That's one of the reasons I am not into stocks anymore It's a 50-50 shot if you make any money plus I don't have the time to do all the research and manage the trade
Sounds like you know what you are doing so if you are making more than you are loosing than you can keep doing it
You may also want to check out Dan and Amy's alert service They are doing some weekly spreads on stocks but not around earnings It's more like a defined risk covered call type trade

I will stick to the SPX This way I only follow one thing so I just have to pick when to get in and when to get out
I did not mean to suggest that I was planing to do something similar to yours Just that I was planing to buy some debit spreads for protection a couple of days out just enough to flatten out the delta
I am just following the price action at this point as a simulated trade in TOS

 

[Mike Schwartz]

Jim, tell us about the analysis software you are using? I could not find it with a google search.

Thanks!

 

[jim leahy]

Jim, tell us about the analysis software you are using? I could not find it with a google search.

Thanks!

that's not commercial software. when i started mentoring lessons a long time ago i didn't want to pay
the high price for existing ones so i wrote my own.

 

[gurk]

Jim, hat tip for that decision, that's quite some achievement. After looking at the commercial alternatives, I have come to appreciate that any DIY-version will have the advantage that
a) you know what it does and what it doesn't do, and
b) you know exactly what mathematical model is used, and
c) you will have learned a lot.
That may actually be more valuable than your savings on a commercial subscription.