FDX (FedEx) IV @ 96th percentile YTD

[Mikael 31]

anybody watching FDX? IV is at 96th percentile YTD. with earnings on 09/18/13, so 2 more weeks to go. 

 

not seeing the vol dropping much before earnings is announced, thinking about 

 

a) since it has weeklies, earnings cal and holding it through earnings, but putting it on and getting some more time decay out of it

just a regular calendar, take some time decay and get out before earnings.
c) sell some puts at the 103 support level. credits are good with vol this high and that resistance level look hard to break through.

 

 

ideas? 

Edited September 3, 2013 by Mikael

[Yowster 9,135]

a couple of thoughts to consider:

• With earnings on 9/18, the weeklies won't come into play for the earnings so I don't think there is a lot to do with them for a trade.
• IV is high as you noted, but when you look at the IV charts for FDX it doesn't always show a consistent pattern of the IV spike into earnings cycles so tying the IV strictly to the earnings event may not all there is to it.
• With the thought that the options may be overpriced, maybe a DC with 105p and 110c (with the stock at 107.60) using the Sept and Oct monthlies may be a decent play.  Once we're at the earnings date, you can consider if you want to leave something on through earnings given that FDX is not typically a big mover on earnings.

[Mikael 31]

Yowster excellent analysis, let's keep track of this tomorrow and see how the stock/IV moves. i'm leaning towards your DC idea 

 

on a side note, is there some pending news coming out before earnings? i did a quick google search and yahoo finance search and found nothing to explain the unusually high IV 2 weeks before earnings.

[dbh21 62]

FWIW, FDX does look high. The current IM is 5.85 which is much higher than historically.

 

[Marco 223]

Thanks for pointing that out Mikael.

If you think IV is high and plan to hold through earnings an IC will make more sense. A DC is long vega. If IV collapses it might still make money if the weekly collapses more and the stock doesn't move but for a DC the DIFFERENCE between weekly and monthly is more important than the absolute level of IV.

[Yowster 9,135]

Thanks for pointing that out Mikael.

If you think IV is high and plan to hold through earnings an IC will make more sense. A DC is long vega. If IV collapses it might still make money if the weekly collapses more and the stock doesn't move but for a DC the DIFFERENCE between weekly and monthly is more important than the absolute level of IV.

Marco - I agree with your statement that the difference between the IV of the short front series and the long back series is more important than the level of IV for a Cal/DC to hold through earnings.  The DC is probably a lower risk trade to hold as we approach earnings.  Then, if you want to hold something through earnings, re-evaluate the situation on that day to see what makes the most sense (even if the IV levels merit holding a DC, you still may need to adjust your strikes to be close to delta neutral).

 

In general, for trades to hold though earnings I've had success with Cals/DCs for stocks with IV's in the mid to higher ranges.  However, as you mention, for lower IV stocks (whose elevated IV is in the 20-30% range) I've had more luck with the ICs for the reason you mention - and for these types of ICs I've done a little better with a hybrid approach where my short strikes are in the front series and my long strikes are the next closest monthly series out.

[Mikael 31]

i sold  the 95 / 115 oct strangle a few minutes ago. filled at nat for 1.99 credit. 

[Mikael 31]

depending on how the stock moves i think i might close the strangle before earnings. or if the stock doesn't move may hold a small allocation through it. FDX doesn't seem to move much during earnings. 

[Mikael 31]

Marco - I agree with your statement that the difference between the IV of the short front series and the long back series is more important than the level of IV for a Cal/DC to hold through earnings.  The DC is probably a lower risk trade to hold as we approach earnings.  Then, if you want to hold something through earnings, re-evaluate the situation on that day to see what makes the most sense (even if the IV levels merit holding a DC, you still may need to adjust your strikes to be close to delta neutral).

 

In general, for trades to hold though earnings I've had success with Cals/DCs for stocks with IV's in the mid to higher ranges.  However, as you mention, for lower IV stocks (whose elevated IV is in the 20-30% range) I've had more luck with the ICs for the reason you mention - and for these types of ICs I've done a little better with a hybrid approach where my short strikes are in the front series and my long strikes are the next closest monthly series out.

 

thanks marco, i decided to short a strangle first and maybe condorize if the stock starts moving in a certain direction. 

[Marco 223]

thanks marco, i decided to short a strangle first and maybe condorize if the stock starts moving in a certain direction. 

you are a braver man than I am ...

 

As a principle I never sell options where I could face unlimited loss. All you need to have done this on something like Enron, Worldcom or more recently Nokia to wave a large chunk of money and potentially your account good bye, trying to collect a bit of theta. Buy the .1 or .05 delta insurance even if you think its worthless. Just my 2c

Edited September 4, 2013 by Marco

[Mikael 31]

i took your advice and bought the .05 delta as insurance on both sides lol.  i wasn't old enough to be trading when eron was around but i heard enough horror stories

[Marco 223]

Knowing your max. loss also means you can allocate and plan much better. If the max loss you want to see is 5k$ or a certain %age of your portfolio then know what the absolute worst case scenario on a trade is let's you allocate accordingly and you can make your position potentially bigger than without knowing your max loss.

[Mikael 31]

I agree. I should start doing more condors haha.

 

Marco one question, if you are short a strangle/IC for an earnings event. do the vol crush after earnings get applied to all the strikes equally?

 

in other words, there are lots of data on the internet for how atm earnings straddles performed, but not for other strikes. so can we extrapolate that reduction/increase in price of the straddle to the strangle as well. 

 

for instance if the ATM straddle went from 2 to 1 dollar after an earnings event, (50% reduction in value), can we extrapolate this 50% reduction to the other strikes. (ie a .2 delta strangle should go from 1 dollar to 50 cents?)

[Marco 223]

Well depends on how much vega is left in the strike. If it's ATM the IV crush will affect it the most. The more in or out of the money it goes the less the impact. If delta is 1 or 0 there's no impact of IV change. So if you get a big move you lose on gamma and won't profit from the drop in IV.

Edited September 5, 2013 by Marco

[Mikael 31]

thanks marco. 

[Yowster 9,135]

I agree. I should start doing more condors haha.

 

Marco one question, if you are short a strangle/IC for an earnings event. do the vol crush after earnings get applied to all the strikes equally?

 

in other words, there are lots of data on the internet for how atm earnings straddles performed, but not for other strikes. so can we extrapolate that reduction/increase in price of the straddle to the strangle as well. 

 

for instance if the ATM straddle went from 2 to 1 dollar after an earnings event, (50% reduction in value), can we extrapolate this 50% reduction to the other strikes. (ie a .2 delta strangle should go from 1 dollar to 50 cents?)

This is why I've had a little more luck with the IC hybrid approach where my short strikes are the front series and the long strikes are the next monthly series out.  The ATM short strikes you are selling will have the biggest impact of the IV crush,  the long strikes will have a lesser dollar impact of the IV crush since the amount of premium is less - and by going out a month the IV crush will not be as high as that of the front series.   Doing the IC using only the front month works too, but I believe the longer further OTM strikes hold more of their value by going out a month with them.

[Mikael 31]

This is why I've had a little more luck with the IC hybrid approach where my short strikes are the front series and the long strikes are the next monthly series out.  The ATM short strikes you are selling will have the biggest impact of the IV crush,  the long strikes will have a lesser dollar impact of the IV crush since the amount of premium is less - and by going out a month the IV crush will not be as high as that of the front series.   Doing the IC using only the front month works too, but I believe the longer further OTM strikes hold more of their value by going out a month with them.

 

yes that makes sense as well. what do you think about a hybrid iron butterfly then. basically selling the front month ATM straddle and hedging both sides with back month OTM strikes.

 

eg. something like this for PAY. (not suggesting to do it but just an idea, not sure if i would want to do it on PAY seeing how they move quite alot past few cycles) 

 

Edited September 5, 2013 by Mikael

[Yowster 9,135]

yes that makes sense as well. what do you think about a hybrid iron butterfly then. basically selling the front month ATM straddle and hedging both sides with back month OTM strikes.

 

eg. something like this for PAY. (not suggesting to do it but just an idea, not sure if i would want to do it on PAY seeing how they move quite alot past few cycles) 

 

2013-09-05_11-16-28.jpg

Yup, that's exactly the type of trade I like to put on for earnings with stocks that don't typically have large earnings moves.  The only difference is that I typically select my long strikes based on the credit I get from the short strikes - so in this case since you're collecting just under $3.00 for the short strikes, I'd use the 17p and 23c as the longs.  This is just personal preference and will lower your worst case loss in the event of a large post earnings move.

[Mikael 31]

yes, maybe tightning the strikes will be a better in case of outlier moves. 

 

here's the atm straddle pricing against IV for the past 5 cycles of FDX.

 

 

 

shorting the ATM straddle made money 3 out of 5 times. turns out FDX can really move. look at the 2 times that the short straddle lost money, the stock moved alot.

 

1 of the two losers had IV which is sigificantly lower than now. below 23%

Edited September 5, 2013 by Mikael

[Mikael 31]

also notice how the last time that the short straddle lost money (march cycle), the HV and IV was very close to together. everytime it made money HV and IV were further apart. 

 

and look at the divergence between HV and IV now... 

 

[Mikael 31]

so might be better to take off the IC before earnings and put on a hybrid iron butterfly to go through earnings.