Why We Sell Our Calendars Before Earnings

Everything mentioned in this article is true. You can go ahead with these strategies provided you are ready for 100% loss in case something bad happens and it will happen . 

I have seen articles where people trade triple calendars to cover wide range. Most of the time it may have been 10 to 20 % winner say for e.g in GOOG.  But if you were there in that trade when GOOG moved 150 points and if you are still in business, you will never try this again.

Hi,

i am a bit confused about stock IV rank and options IV rank.

I have never seen options IV rank before, what is it?

In the article above i read:" ....very high IV rank of NFLX options before earnings ". 

Thanks

Franc

Google search for IV rank gives the following result - https://www.tastytrade.com/tt/learn/iv-rank:

IV rank is our favorite volatility measure at tastytrade. IV rank simply tells us whether implied volatility is high or low in a specific underlying based on the past year of IV data. For example, if XYZ has had an IV between 30 and 60 over the past year and IV is currently at 45, XYZ would have an IV rank of 50%. Since all underlyings have unique IV ranges, stating an arbitrary IV number does not help us decide how we should proceed with a strategy. 

The problem with basing trades on IV rank is that IV is usually high for a reason. You cannot just say "we sell options based on high IV rank". In many cases (like NFLX) stocks move more than implied by options, so selling options based on IV rank in those cases is not a prudent move.

I have a question. I tried a calendar on $NFLX recently and got crushed. What I realized, after the fact, that it was due to the sudden drop in implied volatility the next day, even though $NFLX was moving down strongly. I purchased my calendar spread the day of the of earnings when the prices (and vol) were high. 

I am wondering, if I purchase the spread a week ahead of time, when the vol is lower and then sell the day of the announcement, when vol is highest, will this work and is there another Greek waiting to bite me? 

Thanks in advance!!

If you could post the details of the trade, I might be able to comment.

10 hours ago, Kim said:

If you could post the details of the trade, I might be able to comment.

I was looking at $AMZN 985 Call OCT 27/NOV 3 call spread. I've been researching. I think I was trying to over simplify things. My $NFLX trade, the vol was high when I purchased. On the next day, after earnings, the vol dropped significantly, but I think the vol on the near term didn't drop as severely as the longer term, resulting in my trade going bad. I've looked and I might be in the same situation with this trade, due to earnings. In my mind, it was the sever drop of vol, not the ratio or skew. I was thinking that as the vol increased on the day of earnings, that the opposite would happen. Looking at expected vol for the next few weeks, as well as historical vol over earnings for $AMZN, I'll be in the same boat. I found a way to adjus far and near expiration vol separately on TOS. Guess this isn't the best spread over earnings. 

If you have any tips though, I would greatly appreciate them. 

On 7/20/2016 at 2:07 PM, mukundaa said:

Everything mentioned in this article is true. You can go ahead with these strategies provided you are ready for 100% loss in case something bad happens and it will happen . 

I have seen articles where people trade triple calendars to cover wide range. Most of the time it may have been 10 to 20 % winner say for e.g in GOOG.  But if you were there in that trade when GOOG moved 150 points and if you are still in business, you will never try this again.

 

Hi mukandaa. When has GOOG moved 150 points in the weeks prior to earnings? I don't remember this happening. Is this a hypothetical example? 

On 2017-03-24 at 9:38 AM, Kim said:

Google search for IV rank gives the following result - https://www.tastytrade.com/tt/learn/iv-rank:

IV rank is our favorite volatility measure at tastytrade. IV rank simply tells us whether implied volatility is high or low in a specific underlying based on the past year of IV data. For example, if XYZ has had an IV between 30 and 60 over the past year and IV is currently at 45, XYZ would have an IV rank of 50%. Since all underlyings have unique IV ranges, stating an arbitrary IV number does not help us decide how we should proceed with a strategy. 

The problem with basing trades on IV rank is that IV is usually high for a reason. You cannot just say "we sell options based on high IV rank". In many cases (like NFLX) stocks move more than implied by options, so selling options based on IV rank in those cases is not a prudent move.

@Kim There is also IV Percentile. And I think sometimes traders and providers substitute these meanings.

http://tastytradenetwork.squarespace.com/tt/blog/implied-volatility-rank-and-percentile

On 10/21/2017 at 2:07 AM, Guest Calendar Spreads - Earning said:

I was looking at $AMZN 985 Call OCT 27/NOV 3 call spread. I've been researching. I think I was trying to over simplify things. My $NFLX trade, the vol was high when I purchased. On the next day, after earnings, the vol dropped significantly, but I think the vol on the near term didn't drop as severely as the longer term, resulting in my trade going bad. I've looked and I might be in the same situation with this trade, due to earnings. In my mind, it was the sever drop of vol, not the ratio or skew. I was thinking that as the vol increased on the day of earnings, that the opposite would happen. Looking at expected vol for the next few weeks, as well as historical vol over earnings for $AMZN, I'll be in the same boat. I found a way to adjus far and near expiration vol separately on TOS. Guess this isn't the best spread over earnings. 

If you have any tips though, I would greatly appreciate them. 

 

This is the setup we usually trade - however, you really need to be sensitive to the price. We do extensive backtesting and enter only when the prices are right, compared to previous cycles.

On 10/22/2017 at 6:31 PM, Kim said:

This is the setup we usually trade - however, you really need to be sensitive to the price. We do extensive backtesting and enter only when the prices are right, compared to previous cycles.

Well, I sold before earning for a very small profit and glad that I did. Using the previous IV on the options over past earnings suggested this position could have won big had the IV decreased in a similar matter. In previous earnings the near term vol went from 80% to below 10%, while the long term went from around 40% to 20%. This looked like a possible win on the simulator. In those previous earnings, the price changed around $20 - $30, initially and moved closer towards the pre-earnings price the next day.

In this last earnings, $AMZN had a blowout quarter and the price moved up over $40 initially and up over $70 the next day. Vol on the near term (even though expiring the next day) went through the roof and was up over 110%, while the far term decreased slightly, absolutely crushing the calendar spread. 

Conclusion: Sell before earnings. Anything else is taking a huge risk. Either price or vol crush can kill a calendar spread. Better off using a defined risk strategy and gambiling up/ down on the reaction.