SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

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.

 

Start Your Free Trial

Edited by Kim

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Pre-earnings Momentum Trade in Netflix

    Netflix has earnings due out Monday, October 16th, after the market closes. Seven calendar days before then would be 10-9-2017. Coming off of a nice win in THO, now it's time to look at the company's remarkable history of momentum into earnings events and how it compares to FAANG more broadly. 

    By Ophir Gottlieb,

    • 1 comment
    • 530 views
  • Microsoft Pre-earnings Momentum Trade

    Microsoft has earnings due out on October 26th, 2017, after the market close, according to Wall Street Horizon. 7-days before then would be October 19th, 2017. Microsoft is the forgotten mega tech -- the third largest company in the world behind Apple and Alphabet, but it doesn't fall into any fun Acronyms, like FANG, or FAANG. 

    By Ophir Gottlieb,

    • 14 comments
    • 778 views
  • Options Greeks Explained

    Options Greeks measure the different factors that affect the price of an option contract. Unfortunately, many traders do not know how to read the Greeks when trading. The following infographic provided a brief explanation of the most important Greeks: theta, delta, gamma vega and rho.

    By Kim,

    • 0 comments
    • 315 views
  • Option Trade After Earnings in AutoZone

    AutoZone Inc (NYSE:AZO) has earnings due out tomorrow, 9-19-2017 before the market opens and we can look at a slightly advanced option trade that starts two calendar days after AZO earnings (9-21-2017) and lasts for the 19 calendar days to follow, that has been a winner for the last 3 years. 

    By Ophir Gottlieb,

    • 0 comments
    • 407 views
  • Why Winning Ratio Means Nothing

    A lot of options traders consider 90% probability strategies a Holy Grail of trading. After all, if you can win 90% of the time, you should be able to grow your account very quickly, right? Well, not only this is not true, but in fact, winning ratio alone tells you NOTHING about your chances to be profitable. 

    By Kim,

    • 0 comments
    • 1,951 views
  • Post Earnings Option Trade in Facebook

    For Facebook Inc, irrespective of whether the earnings move was up or down, if we waited one-day, and then sold an one-week at out of the money iron condor (using weekly options), the results were quite strong. This trade opens two calendar after earnings to try to let the stock find equilibrium after the earnings announcement. 

    By Ophir Gottlieb,

    • 0 comments
    • 333 views
  • The Incredible Option Trade in VXX

    The iPath S&P 500 VIX Short Term Futures TM ETN (NYSEARCA:VXX) is referred to as "the VXX.". The obligation of the VXX is to match the performance of the S&P 500 VIX Short-Term Futures Index Total Return and that is a strategy index which maintains positions in the front two-month Volatility Index (VIX) futures contracts. 

    By Ophir Gottlieb,

    • 0 comments
    • 765 views
  • The Art of Trading Decisions

    One of my basic tenets in teaching people how to trade options is that rules and guidelines should not be written in stone and that there are valid reasons for accepting or rejecting some of them. When I offer a rationale or explanation or suggest course of action, it is because I have found that this specific suggestion has worked best for me.

    By MarkWolfinger,

    • 0 comments
    • 351 views
  • Trade Iron Condors Like Never Before

    Iron Condors have gained a lot of popularity among professional money managers and retail investors. It is a market neutral strategy that allows you to profit when the underlying price moves sideways. Iron Condors usually have a limited risk and a high probability of success.

    By Kim,

    • 2 comments
    • 6,609 views
  • Early Exercise: Call Options

    How would a trader like you decide to do early exercise? Say you bought calls when they were trading in the 1.0 -> 2.5 range, now underlying has risen so that calls trade bid-ask at 4.0 / 4.8 and there is strong possibility of it going higher. Also assume in another case that they trade in the 6.0 to 7.0 range.

    By MarkWolfinger,

    • 0 comments
    • 1,854 views

  Report Article

We want to hear from you!


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.

Share this comment


Link to comment
Share on other sites
Guest Kaustubh

Posted · Report

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

 

Share this comment


Link to comment
Share on other sites

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.

Share this comment


Link to comment
Share on other sites
Guest Kaustubh

Posted · Report

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

 

 

 

Share this comment


Link to comment
Share on other sites

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.

Share this comment


Link to comment
Share on other sites

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.

Share this comment


Link to comment
Share on other sites


Your content will need to be approved by a moderator

Guest
You are commenting as a guest. If you have an account, please sign in.
Add a comment...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoticons maximum are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...