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TSLA, LNKD, NFLX, GOOG: Thank You, See You Next Cycle


Our long term followers know that buying premium into earnings is one of our favorite strategies. I wrote about the strategy in my Seeking Alpha article Exploiting Earnings Associated Rising Volatility. IV (Implied Volatility) usually increases sharply a few days before earnings, and the increase should compensate for the negative theta. We have been using this strategy in our SteadyOptions model portfolio with great success.

However, not all stocks are suitable for that strategy. Some stocks experience consistent pattern of losses when buying premium before earnings. For those stocks we are using some alternative strategies like calendars.

 

In one of my previous articles I described a study done by tastytrade, claiming that buying premium before earnings does not work. Let's leave aside the fact that the study was severely flawed and skewed by buying "future ATM straddle" which simply doesn't make sense (see the article for full details). Today I want to talk about the stocks they used in the study: TSLA, LNKD, NFLX, AAPL, GOOG.

 

Those stocks are among the worst candidates for a straddle option strategy. In fact, they are so bad that they became our best candidates for a calendar spread strategy (which is basically the opposite of a straddle strategy). Here are our results from trading those stocks in the recent cycles:

  • TSLA: +28%, +31%, +37%, +26%, +26%, +23%
  • LNKD: +30%, +5%, +40%, +33%
  • NFLX: +10%, +20%, +30%, +16%, +30%, +32%, +18%
  • GOOG: +33%, +33%, +50%, -7%, +26%

 

You read this right: 21 winners, only one small loser.

 

This cycle was no exception: all four trades were winners, with average gain of 25.2%.

 

I'm not sure if tastytrade used those stocks on purpose to reach the conclusion they wanted to reach, but the fact remains. To do a reliable study, it is not enough to take a random list of stocks and reach a conclusion that a strategy doesn't work.

 

At SteadyOptions we spend hundreds of hours of backtesting to find the best parameters for our trades:

  • Which strategy is suitable for which stocks?
  • When is the optimal time to enter?
  • How to manage the position?
  • When to take profits?

 

The results speak for themselves. We booked 147% ROI in 2014 and 32% ROI so far in 2015. All results are based on real trades, not some kind of hypothetical or backtested random study.

 

Related Articles:

How We Trade Straddle Option Strategy

How We Trade Calendar Spreads

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

The Less Risky Way To Trade TSLA

 

If you want to learn more how to use our profitable strategies and increase your odds:

 

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Edited by Kim

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Guest BIOTRADER

Posted

Kim, just to be clear. A calendar is not the opposite of a long straddle. It's has a much different risk profile.

If those are the worst straddle candidates what are the best?

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Opposite might be not the best choice of words. However:

 

Straddle is theta negative, gamma positive trade, while calendar is theta positive, gamma negative.

 

Straddle makes money when the stock moves, calendar loses money when the stock moves. So they are kind of opposite strategies. Even the risk profiles look "upside down".

 

There are many good candidates for straddles. We usually made very good gains with RL, OVTI, INTC, MSFT, NKE, AZO, ORCL among others.

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Kim ..  Very informative.Thanks! I have a couple of follow up questions.
 
 

Those stocks are among the worst candidates for a straddle

 

Can you please explain what makes these (TSLA, LNKD, NFLX, AAPL, GOOG) worst candidates for a long straddle ?

 

There are many good candidates for straddles.

I am curious to know your criteria for picking candidates for Calendar vs Straddle.

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It is based mostly on backtesting. Some stocks are consistently losing money when using straddles. The IV is simply too high and is not keeping up with the negative theta.

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Thanks Kim. If I understood you correctly, a long straddle is vega positive and theta negative.

With already high IV when you enter the trade, the vega gains for these is lower than the theta loss. 

 

Does it make sense to enter the long straddle a few days earlier, before the IV gets very high ? Let me know your thoughts.

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From my experience, the best timeframe to enter is around 5-10 days before earnings. Entering earlier will usually pay off only if the stock starts to move. But it also depends on the price, history of the stock etc. Each stock is different. This is why we do extensive backtesting to determine the best price and timing to enter.

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