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

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

  • 8 Strategies For High Volatility Markets

    Trading in high-vol environments requires a different approach from low-vol markets. Here are 8 strategies to improve your trading and help you to survive in high volatility markets. They are very different from strategies in low volatility environment.

    By TFCAB,

    • 0 comments
    • 15 views
  • Selling Options Premium: Myths Vs. Reality

    Selling Options Premium refers to certain set of strategies that involve net selling of options, as opposed to buying premium where you are net buyer of options. There are a lot of myths and misconceptions about Selling Options Premium. This article will explain the basic concepts and debunk some of the myths.

    By Kim,

    • 0 comments
    • 360 views
  • Combining Momentum and Put Selling (Updated)

    In February of 2017, I wrote an article about combining together the concepts of momentum and put selling. You can find that article here as prerequisite reading. With this post, we'll look at how the strategy presented has done since then, along with some additional implementation ideas.

    By Jesse,

    • 2 comments
    • 309 views
  • Options and Invisible Risks

    Entry and exit timing is crucial to successful options trading, without doubt. However, one form of risk not often acknowledged is the risk of taking too many actions, too soon, and for the wrong reasons.

    By Michael C. Thomsett,

    • 0 comments
    • 421 views
  • The Volatility Option Trade In Alibaba

    This is why you have a Trade Machine membership. We can ride the evergreen patterns, and we have, for years. But when the market shifts, we need a minimum amount of data to adjust, and succeed -- now we will. This is our time.

    By Ophir Gottlieb,

    • 0 comments
    • 604 views
  • James Cordier: Another Options Selling Firm Goes Bust

    On November 1, 2018, a money manager named James Cordier from OptionSellers.com published an article on Seeking Alpha named Option Selling Opportunities So Good They're Scary. To me, this title alone would be enough to completely discredit the author and not trust him with my hard earned money.

    By Kim,

    • 10 comments
    • 4,683 views
  • Do You Have a Written Investment Plan?

    Meb Faber recently polled his twitter followers, and found that only about 25% have a written investment plan. Your investment plan should be based on your willingness (risk tolerance) and need (required rate of return to meet your long term goals) to take risk. 

    By Jesse,

    • 0 comments
    • 474 views
  • Options Delta And Other Greeks

    The most worthwhile of the "Greeks" for options trading (and specifically for timing of trades) is options delta. This indicator looks at likely change in option value relative to change in the value of the underlying. The higher the delta level, the more likely the premium will move more than movement in the same direction for the underlying.

    By Michael C. Thomsett,

    • 0 comments
    • 573 views
  • Leveraged Anchor Update

    We wanted to provide a quick update on the Anchor strategy tweaks and improvements. We’ve now been tracking the two different leveraged Anchor Portfolios for close to six months – more than enough time to began a review of performance and make some definitive decisions.

    By cwelsh,

    • 0 comments
    • 506 views
  • The Volatility Option Trade in Apple

    We can ride the evergreen patterns, and we have, for years. But when the market shifts, we need a minimum amount of data to adjust, and succeed -- now we will. This is our time with Apple. It's time to take advantage of volatility. Fear, uncertainty, doubt, unclear news headlines. 

    By Ophir Gottlieb,

    • 0 comments
    • 734 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

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

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 emoji 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...

Options Trading Blogs