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How We Nailed The Implied Volatility Game


Oracle (ORCL) has been following a similar pattern in the last few years. They announce their earnings date on the first week of the third month of the quarter and report during the third week of the month. Yet many times the options market "assumes" earnings during the fourth week and under-prices the third week options.

This cycle was no exception. 

It is a well known fact that Implied Volatility of options increases before earnings. We usually take advantage of this phenomenon by buying a straddle option few days before the earnings date.

However, Oracle case was slightly different. As I mentioned, they follow a similar pattern of earnings dates in the last few years (third week of the month), but for some reason, the options market tends to be "surprised" after the earnings date is actually confirmed.


On February 27 I opened ORCL trade discussion topic and posted the following information:

Capture.PNG

My initial intention was to trade the Mar.24 straddle, which would be a safer bet.

However, after checking again the previous cycles and seeing the Mar.17 straddle dipping below $1.45, I decided to take the risk and execute the Mar.17 straddle. The trade has been posted on the forum on Mar.01:

Capture.PNG

I posted the rationale for selecting the Mar.17 expiration, with all supporting information, including the risks:

Capture.PNG

Two days later, Oracle confirmed earnings on Mar.15, as expected.

Capture.PNG

IV of Mar.17 options jumped 4 points after the date has been confirmed, and we closed the trade for 20.1% gain.

Capture.PNG

This is a great example how we make Implied Volatility to work for us. We implement few strategies that take advantage of Implied Volatility changes around the earnings event.

Of course, this trade was not without risks. If earnings were confirmed on week of Mar.24, the Mar.17 straddle could easily lose ~40%. But options trading is a game of probabilities. Based on previous cycles, I estimated that there was ~90% chance that earnings will be on week of Mar.17. Making 20% 9 out of 10 times and losing 40% in one trade still puts you far ahead, with 140% cumulative gain. I also provided members all the necessary information so everyone could make an educated decision.

At SteadyOptions, the learning never stops. If you think education is expensive, try ignorance.
 

Related Articles:

 

How We Trade Straddle Option Strategy
Buying Premium Prior to Earnings
Can We Profit From Volatility Expansion into Earnings
Long Straddle: A Guaranteed Win?
Why We Sell Our Straddles Before Earnings
Options Trading Greeks: Vega For Volatility

 

Want to learn more? We discuss all our trades on our forum.

 

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Kim, I have lived this phenomenon a number of times already and, as some other situations (Fi Vix futures contango reversion to the spot) make me feel a bit scared. How MM do not correct/factor this "anomalyties" to happen over and over in advance?.

This is a bit more unknown, but Vix contango is known by any trader with some few months of experience.

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Well, the ORCL phenomena is really interesting as it happened almost every cycle. The VIX is a little bit less predictable.

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Guest Kaustubh

Posted

Hi Kim,

Nice article, 

Does this work for most of stocks?

i.e. Predicting result date based on historical data & buying appropriate expiry straddle few days before date announcement.

Warm Regards,

Kaustubh

 

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Well, for most stocks, the options market gets the date right. There are some opportunities based on wrong earnings dates, but they are not too common.

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Guest Kaustubh

Posted

ok, Tks.

So, A trader should focus on 2 dates : "Date of announcement of earnings date" & "Actual earnings date".

A right approach would be to buy a straddle 2 days before before anticipated "Date of announcement of earnings date" for specific anticipated weekly expiry.

Few other of your articles suggests to buy a straddle 7 days before "Actual earnings date"

Could you please clarify?

Was the "7 days before" approach applicable when weekly stock option were not available?

Warm Regards,

Kaustubh

 

 

 

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Buying 2 days before before anticipated "Date of announcement of earnings date" will work if we have a reason to believe that the options market is wrong about the date (like in ORCL case). In other cases, we enter anywhere from 2 to 10 days before the actual earnings date, depending on prices and backtesting. A lot of effort is placed into backtesting of different scenarios to find the best setups.

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If we had purchased the March 24 straddle for $1.86 (your more conservative trade), how much would we have gained or lost after Oracle's announcement of the earnings date.

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