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Kim

Can We Profit From Volatility Expansion Into Earnings?

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In one of my previous articles I described a study done by tastytrade, claiming that buying premium before earnings does not work. The title of the study was "We Put The Nail In The Coffin On "Buying Premium Prior To Earnings".

​I demonstrated that their study was highly flawed, for several reasons (strikes selection, stocks selection, timing etc.)

It seems that they did now another study, claiming to get similar results.

Click here to view the article

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    • By Kim
      Introduction
      The first question you need to answer is: will you hold your position through earnings, or will you close it before the announcement. 
       
      In some of my previous articles, I described few ways to trade earnings if you don't want to hold the trade through the announcement. Our favorite ways to do it are with Straddles and Calendar Spreads. Personally I don't like to hold those trades through earnings. But if you decide to do so, please make sure you do it the proper way and understand the risks.

      So if you decided to hold, the next questions would be: directional or non directional? Buy premium or sell premium?

      Here is a simple way to look at potential trades. The options market will always tell you how much stock movement the options market is pricing in for earnings, or any event. 
       
      For example, let’s take a look at what the options market was expecting from Apple (AAPL), which reported earnings last month.
       
      With AAPL stock trading at 190 we need to look at the price of the straddle closest to 190. And these options need to be the calls and puts that expire the week of earnings.

      In this case, with earnings on July 31, we look for the options that expire on Friday, August 3. The calls were worth approximately $4.85, and the puts were worth $4.27 just before earnings were announced. When we combine these two values it tells us that the options market is pricing in an expected move of $9.12, or 4.8%, after earnings. This is what we call the "implied move".

      Now you need to do some homework and decide if you believe the options are overpriced (and the stock will move less than the implied move) or underpriced (and the stock will move more than the implied move).
      Buying Premium
      If you believe that the options are underpriced, you should buy premium, using a long straddle or a long strangle.

      If you buy a straddle, then the P/L is pretty much straightforward:
      If the stock moves more than the implied move after earnings, your trade will be a winner. If the stock moves less than the implied move after earnings, your trade will be a loser. Taking AAPL earnings as an example:
       
      The straddle implied $9.12 or 4.8% move. In reality the stock moved almost $12, or ~6.0%. Which means that the straddle return was over 25%.

      Strangle is a more aggressive strategy. It would usually require the stock to move more to produce a gain. But if the stock cooperates, the gains will be higher as well. In case of AAPL, doing 185/195 strange would produce over 40% gain (all prices are at the market close before and after earnings).

      Obviously if the stock did not cooperate, the strangle would lose more as well. Which makes it a higher risk higher reward trade.
       
      Selling Premium
      If you believe that the options are overderpriced, you should sell premium. You can sell premium in one of the following ways:
      Sell a (naked) straddle. This strategy is the opposite of buying a long straddle, and the results will be obviously opposite as well. If the stock moves more than expected, the trade will be a loser. If it moves less than expected, it will be a winner.
        Sell a (naked) strangle. This strategy is an opposite of buying a long strangle, and similarly, a more aggressive trade. Take the last FB earnings for example. Selling 1 SD strangle would produce a $208 credit. When the stock was down almost 20% after earnings, the trade was down a whopping $2,407, which would erase 12 months of gains (even if ALL previous trades were winners). This is why I would recommend never holding naked options positions through earnings. The risk is just too high.
        Buy an iron condor. This strategy would involve selling a strangle and limiting the risk by buying further OTM strangle. In case of a big move, your loss is at least limited. Selling options around 1 SD would produce modest gains most of the time, but average loss will typically be few times higher than average gain.
        Buy a butterfly spread. This strategy would involve selling a straddle and limiting the risk by buying a strangle. In case of a big move, your loss is at least limited, like with iron condor. This strategy has much more favorable risk/reward than iron condor, but number of losing trades will be much higher as well.
        Buy a calendar spread. This strategy would involve selling ATM put or call expiring on the week of earnings and buying ATM put or call with further expiration. The rationale is that near term short options will experience much bigger IV collapse than the long options, making the trade a winner. To me, this would probably be the best way to hold through earnings in terms of risk/reward and limiting the losses. As a rule of thumb:
      If the stock moves as expected after earnings, all strategies will be around breakeven. If the stock moves more than expected after earnings, all premium buying strategies will be winners, and all premium selling strategies will be losers. So which one is better?
      To me, any strategy that involves holding through earnings is just slightly better than 50/50 gamble (assuming you did your homework and believe that you have an edge). Earnings are completely unpredictable. Selling options around earnings have an edge on average for most stocks, but they have a much higher risk than buying options, especially if the options are uncovered. Those "one in a lifetime events" like Facebook 20% drop happen more often than you believe.

      Many options "gurus" recommend selling premium before earnings to take advantage of Implied Volatility collapse that happens after earnings. What they "forget" to mention is the fact that if the stock makes a huge move, IV collapse will not be very helpful. The trade will be a big loser regardless.
      Directional or non directional?
      So far we discussed non directional earnings trades, where you select ATM options. But those trades can be structured with directional bias as well. For example:
       
      If you were bullish before AAPL earnings and believed the stock will go higher, instead of buying the 190 straddle, you could buy the 185 straddle. This trade would be bullish, and earn more if the stock moved higher, but it would also lose more than ATM straddle if you were wrong and the stock moved down. As an alternative, you could buy an OTM calendar (for example, at $200 strike). If you were right, you would benefit twice: from the stock direction and IV collapse. But you would need to "guess" the price where you believe the stock will be trading after earnings with high level of accuracy. If you guess the direction right, but the stock makes huge move beyond the calendar strike, you can still lose money even if you were right about the direction.

      For example, the 190 (ATM) calendar would lose around 40-50% (which was expected since the stock moved more than the implied move). But the 200 (OTM) calendar would gain around 120% since the stock moved pretty close to the 200 strike, so you gained from the IV collapse AND the stock movement.
      Conclusion
      Earnings trades are high risk high reward trades if held through earnings. Anything can happen after earnings, so you should always assume 100% loss and use a proper position sizing. Traders who advocate those strategies argue that they can always control risk with position sizing, which is true.

      But the question is: if I can trade safer strategies and allocate 10% per trade, why trade those high risk strategies and allocate only 2% per trade? After all, what matters if the total portfolio return. If a trade which is closed before earnings earns 20% (with 10% allocation), it contributes 2% growth to the portfolio. To get the same portfolio return on a trade with 2% allocation, it has to earn 100%.

      Is it worth the risk and the stress? That's for you to decide.

      Related articles:
      How We Trade Straddle Option Strategy Buying Premium Prior To Earnings - Does It Work? Why We Sell Our Straddles Before Earnings Selling Strangles Prior To Earnings How We Trade Calendar Spreads Long Straddle Through Earnings Backtest
    • By Kim
      We already debunked some of those "studies" here and here. Today we will debunk another study, and will show how to do it properly.

      On July 7, 2015, tastytrade conducted a study using AAPL, GMCR, AMZN and TSLA. An ATM straddle was purchased 21 days prior to earnings and closed the day before earnings. A table showed the results. The win rate, total P/L, average P/L per day, biggest win and biggest loss were shown:

        

      Their conclusion:



      Wait... They concluded that buying volatility prior to earnings doesn't work based on 4 stocks? Why those 4 specific stocks? Why 21 days prior to earnings?

      Our members know that those 4 stocks are among the worst to use for this strategy. They also know that entering 21 days prior to earnings is usually way too early (there are some exceptions).

      Also, what is a significance of dollar P/L when comparing stocks like AMZN and AAPL? At current prices, AMZN straddle would cost around $8,500 while AAPL straddle around $1,200. Theoretically, if we had a 10% loss on AMZN (-$850) and 50% gain on AAPL ($600), the total P/L would be -$250. But the correct calculation would be total P/L of +40% because we need to give equal dollar weight to all trades.

      But lets see how changing just one parameter can change the results dramatically. We will be using AAPL as an example. 

      First lets use the study parameter of 21 days.


      Tap Here to See the back-test

      Entering 21 days prior to earnings is indeed a losing proposition. But lets change it to 10 days and see what happens:


      Tap Here to See the back-test
       
      Can you see how changing one single parameter changes the results dramatically? I have a feeling that tastytrade knew that 21 days would be not the best time to enter - but using different parameters wouldn't fit their thesis.


      Now lets test the strategy on some of our favorite stocks.

      NKE, 14 days and 15% profit target:


      Tap Here to See the back-test
       

      MSFT, 7 days and 15% profit target:
       

      Tap Here to See the back-test


      CSCO, 21 days and 10% profit target:


      Tap Here to See the back-test

       
      IBM, 7 days and 15% profit target:


      Tap Here to See the back-test

       
      ORCL, 14 days and 20% profit target:


      Tap Here to See the back-test

       
      WMT, 7 days and 10% profit target:
       

      Tap Here to See the back-test
       

      As you can see, different stocks require different timing and different profit targets. Some work better entering 7 days prior to earnings, some might improve performance with an entry as early as 21 days prior to earnings.

      The bottom line is: you cannot just select random stocks, combine it with random timing and no trade management, and declare that the strategy doesn't work. But if you select the stocks carefully, combine it with the right timing and trade management, it works very well. Here are our results, based on live trades, not skewed "studies":


       
      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 Is 5% A Good Return For Options Trades?
    • By Stephan Haller
      Lately we experienced a 7% down move in the S&P 500.
       

      image source: TOS trading platform  
      We have also seen an explosion in the VIX.


      image source: TOS trading platform  
      All in all a pretty shitty situation if you have a delta neutral short premium portfolio.
       
      So let's have a look how a portfolio consisting of 30 delta short strangles and/or atm short straddles in IWM, FXE, TLT, GLD, XLE, which was started before this wild ride in the markets happened, would have performed.
       
      Set up
      As shown in my books, IWM, FXE, TLT, GLD, XLE are the most uncorrelated ETFs. With these underlyings you have exposure to the Russell 2000, the Euro Currency, Bonds, Gold and the Oil Sector.
       
      Rules
      $100k portfolio capital allocation based on the VIX (20-25% allocation in very low VIX environment, 40-50% in a high VIX environment) equal buying power in all underlyings never go above 3x leverage in notional value 30 delta short strangles or atm straddles about 45 DTE profit target = 16 delta strangle credit at trade entry close all positions at 21 DTE if profit target is not hit before if short strike in strangles gets hit, roll untested side into a short straddle (original profit target doesn't change) if break even in a short straddle gets hit, roll untested side to the new atm strike (going inverted) if IVR in IWM goes above 50% and/or VIX makes a big up move, add aggressive short delta strangle to balance deltas
        Portfolio Performance
      As a starting date I picked July 30th 2019, probably the worst day in this expiration cycle to start this kind of portfolio. Since the VIX and IVR was pretty low at this moment, I committed only a little bit above 25% of my net liq.
       
      IWM

      image source: TOS trading platform
        FXE

      image source: TOS trading platform  
      TLT

      image source: TOS trading platform  
      GLD

      image source: TOS trading platform  
      XLE

      image source: TOS trading platform  
      Portfolio


      So far in dollar terms a $1,571.50 loss or 1.571% loss on the whole portfolio.

      Not too bad considering the IV explosion and the big moves, especially in TLT.

      As you can see, even in a tough market with big outside the expected moves and IV explosion, short strangles/straddles are not a recipe for disaster.

      The key is to trade small when IV is low and mechanically adjust your positions/deltas.

      Of course the expiration cycle is not over yet and we can still have more big moves and much higher implied volatility in the coming days, but you should have seen now, when you have the right set of rules and religiously stick to these rules and when you trade small enough when IV is low, you are not going to blow up your portfolio.

      Stephan Haller is an author, teacher, options trader and public speaker with over 20 years of experience in the financial markets. Check out his trilogy on options trading here. This article is used here with permission and originally appeared here.



      Related articles
      Selling Naked Strangles: The Math Selling Short Strangles And Straddles - Does It Work? James Cordier: Another Options Selling Firm Goes Bust How Victor Niederhoffer Blew Up - Twice  
    • By Stephan Haller
      But with undefined risk strategies comes theoretical unlimited risk. Therefore it is crucial that you follow the rules I pointed out in my books and which are mentioned about almost every day on tastytrade
      Rules:
      do not use more than 40 - 50% of your available capital on your overall portfolio do not use more leverage than 3x notional of your net liq (if you have a $100k account, don't go over $300k notional) manage at 21 DTE to avoid gamma risk manage your strangles at 50% of max profit and your straddles at 25% of max profit. spread your risk among lots of uncorrelated underlyings commit capital based on IVR or the VIX (high VIX risk up to 50% on your overall portfolio, if VIX is low, risk less) Now let's have a look at what you can expect in profit if you sell different type of strangles/straddles:
       
      16 Delta Short Strangles:
      tastytrade has shown in a study that you can expect to keep 25% of the daily theta if you sell 16 delta short strangles in SPY, IWM and TLT.



      Image source: tastytrade  
      Let's have a look at how much contracts you could sell, until you exceed 50% of your capital in margin requirement and/or 3x notional leverage and how much money you would make in a full year.

      For the study I was using August 13th 2019 closing prices. Although the percentage of theta you can expect to keep is higher than 25% in SPY and IWM, I was using the 25% number, to be more conservative.
       
      SPY 16 Delta Strangles


      As you can see, if you just sell 16 delta short strangles in SPY, you can expect to make 9.11% in profit, if you go up to 3x notional leverage.

      IWM 16 Delta Short Strangles


      As you can see, if you just sell 16 delta short strangles in IWM, you can expect to make 10.93% in profit, if you commit 50% of your buying power.
       
      Now let's have a look at short straddles. 

      tastytrade has shown in a study that you can expect to keep 40-50 % of the daily theta if you sell atm short straddles in SPY.
       

      Image source: tastytrade
      Let's have a look at how much contracts you could sell, until you exceed 50% of your capital in margin requirement and/or 3x notional leverage and how much money you would make in a full year.

      For the study I was using August 13th 2019 closing prices.
      For the daily theta you can expect to keep, I was using 45% as the tastytrade suggested.
       
      SPY Short Straddles


      As you can see, if you just sell atm short straddles in SPY, you can expect to make 18.13% in profit, if you commit 46.83% of your buying power.

      IWM Short Straddles


      As you can see, if you just sell atm short straddles in SPY, you can expect to make 25.25% in profit, if you commit 48.12% of your buying power.

      Since we want to diversify our portfolio, let's have a look at the 5 most uncorrelated underlyings, which I showed in my first book.

      For these examples I was using today's (August 14 2019) prices right at the open.

      GLD Short Straddles


      TLT Short Straddles


      FXE Short Straddles


      IWM Short Straddles


      XLE Short Straddles




      In the next article I will show you how to build a portfolio with these five underlyings and how to commit your capital based on the VIX, so that you don't get wiped out in a move we experience at the moment.

      Stephan Haller is an author, teacher, options trader and public speaker with over 20 years of experience in the financial markets. Check out his trilogy on options trading here. This article is used here with permission and originally appeared here.


       
    • By Kim
      Here is how their methodology works:
       
      In theory, if you knew exactly what price a stock would be immediately before earnings, you could purchase the corresponding straddle a number of days beforehand. To test this, we looked at the past 4 earnings cycles in 5 different stocks. We recorded the closing price of each stock immediately before the earnings announcement. We then went back 14 days and purchased the straddle using the strikes recorded on the close prior to earnings. We closed those positions immediately before earnings were to be reported.


       

       
      Study Parameters:


      TSLA, LNKD, NFLX, AAPL, GOOG Past 4 earnings cycles 14 days prior to earnings - purchased future ATM straddle Sold positions on the close before earnings  
      The results:
       
      Future ATM straddle produced average ROC of -19%.
       
      As an example:
       
      In the previous cycle, TSLA was trading around $219 two weeks before earnings. The stock closed around $201 a day before earnings. According to tastytrade methodology, they would buy the 200 straddle 2 weeks before earnings. They claim that this is the best case scenario for buying pre-earnings straddles.

      My Rebuttal 
       
      Wait a minute.. This is a straddle, not a calendar. For a calendar, the stock has to trade as close to the strike as possible to realize the maximum gain. For a straddle, it's exactly the opposite:
       

       
      When you buy a straddle, you want the stock to move away from your strike, not towards the strike. You LOSE the maximum amount of money if the stock moves to the strike.
       
      In case of TSLA, if you wanted to trade pre-earnings straddle 2 weeks before earnings when the stock was at $219, you would purchase the 220 straddle, not 200 straddle. If you do that, you start delta neutral and have some gamma gains when the stock moves to $200. But if you start with 200 straddle, your initial setup is delta positive, while you know that the stock will move against you. 
       
      It still does not guarantee that the straddle will be profitable. You need to select the best timing (usually 5-7 days, not 14 days) and select the stocks carefully (some stocks are better candidates than others). But using tastytrade methodology would GUARANTEE that the strategy will lose money 90% of the time. It almost feels like they deliberately used those parameters to reach the conclusion they wanted.
       
      As a side note, the five stocks they selected for the study are among the worst possible candidates for this strategy. It almost feels like they selected the worst possible parameters in terms of strike, timing and stocks, in order to reach the conclusion they wanted to reach.
       
      At SteadyOptions, buying pre-earnings straddles is one of our key strategies. It works very well for us. Check out our performance page for full results. As you can see from our results, "Buying Premium Prior To Earnings" is still alive and kicking. Not exactly "Nail In The Coffin".
       
      Comment: the segment has been removed from tastytrade website, which shows that they realized how absurd it was. We linked to the YouTube video which is still there.
       
      Of course the devil is in the details. There are many moving parts to this strategy:
      When to enter? Which stocks to use? How to manage the position? When to take profits?  
      And much more. But overall, this strategy has been working very well for us. If you want to learn more how to use it (and many other profitable strategies):
       
      Start Your Free Trial
       
      Related Articles:
      How We Trade Straddle Option Strategy
      Can We Profit From Volatility Expansion into Earnings
      Long Straddle: A Guaranteed Win?
      Why We Sell Our Straddles Before Earnings
      Long Straddle: A Guaranteed Win?
      How We Made 23% On QIHU Straddle In 4 Hours
    • By Kim
      There is a lot of buz lately related to tastytrade, Tom Sosnoff, Karen Supertrader etc. so I thought it would be appropriate to open a discussion topic where members can discuss tastytrade and exchange ideas and opinions.
       
      Here are some links to articles and posts about tastytrade.

      Karen Supertrader: Myth Or Reality?
      Karen Supertrader: Too Good To Be True?
      Karen The Supertrader Interviewed by tastytrade
      Why 'Karen the Supertrader's' Story Never Made Sense
      Tastytrade: A Shill with Skills
      Can We Profit From Volatility Expansion Into Earnings?
      Buying Premium Prior To Earnings - Does It Work?
      Another garbage study from Tasty Trade
      Reviews of TastyTrade.com at Investimonials
       
      While the shows can be entertaining, here is one opinion that summarizes what tastytrade do:
       
    • By Kim
      What lessons we can learn from this debacle?
       
      Were the Skeptics Right?
       
      "Self-taught options trader Karen Bruton (aka Karen the Supertrader) earned so much so quickly that some skeptics doubted her. In reality, the SEC says, she improperly concealed more than $50 million of losses."
       
      The new allegations paint a very un-uber portrait of Bruton, 66, a self-taught options trader who mesmerized fans and flummoxed skeptics with her life story of parlaying a $10,000 initial investment into a fortune and seemingly endless stream of profits.
       
      I'm still trying to understand the motives of tastytrade when they promoted her as making $105MM PROFIT, without properly discussing the risks. They also failed to mention that most of the growth in her fund came from  new money and not actual profits. Was it extreme ignorance or some hidden agenda? You decide.
       
      As a reminder, Karen claimed to make 25-30% per year by selling naked options on indexes. 
       
      The important point is this: 
       
      As I mentioned in my article, there is only one way to make 25-30% per year with this strategy: leverage. Combine leverage with naked strangle strategy which is very risky to begin with is a certain path to financial disaster.
       
      Leverage Can Kill You!
       
      Our contributor Jesse wrote over a year ago:
       
      "All trading has risk. It's not the strategy that determines if something is risky...it's the position size (amount of leverage) and risk management that does (and then the discipline of the trader to follow the plan which often means taking a pre-defined loss before it gets out of control)."
       
      Is selling naked options risky? That's the wrong question - ask better questions, and you'll get better answers...Is selling excessively leveraged naked options that aren't cash secured risky? Yes, eventually. Short strangles on SPX and other index products are money making trades over the long term, you just have to use sensible position size and sensible exits. Just don't get greedy. Pigs get fat, hogs get slaughtered.
       
      "The point here is not to dismiss all volatility and option selling strategies as useless and blow up prone. The short volatility trade on equity indices is one of the best trades out there. It does very well long-term. " 
       
      The point is to understand your risk. In fact, be obsessed with risk management if you want to survive as a trader for the long term.
       
      Well said Jesse.
       

       
      Also Hiding the Losses?
       
      To add insult to injury, Karen Bruton also started to hide the losses by rolling options positions, as explained here:
       
      "Between October and December of 2014, Karen took some heavy losses selling her options. But to keep the incentive fees coming in, she organized a sophisticated options roll at the end of each month. This allowed her to still “realize gains” of 1% every month to take fees from, while pushing unrealized losses out to the next month. Month after month the losses continued to snowball while she continued to collect her fees.
       
      Each month began with a huge realized loss. (The SEC reports that these losses now exceed $50 million dollars.) She offset these accrued losses by selling a ton of in-the-money call options on the S&P 500 E-mini futures due to expire at the end of the month. This injected fresh cash into the fund. Just enough so that she could report a small realized gain to investors. That way she could take fees that month too…
       
      But of course there’s no free lunch in trading. You don’t get gains out of nowhere. When these call options expired, yes she had her cash injection (from the option premium), but she was also left with a futures position (due to assignment) that carried a huge unrealized loss. Here’s where the loss rolling came in. She needed that futures position to stay open until the next month because if she closed it beforehand, that would realize a loss and cancel out the profits from the calls she sold. That means no incentive fees.
       
      So to cover this futures position, she would simultaneously purchasein-the-money call options expiring the following month on the same day she sold those original in-the-money call options. These calls allowed her to offset any gains or losses the futures incurred at the end of the month until the beginning of the next month.
       
      This all smells like a classic Ponzi scheme…Pay the old investors with money from the new ones."
       

       
      We are very familiar with those "rolling" techniques. Many options newsletters are using them to hide their losses. As we always said, rolling options position is simply hiding the loss.
       
      The Hope Investments fund has been created in March 2011, and October 2014 was only the second time since creation when S&P declined more than 10%. First time (August 2011) she probably hasn't been using as much leverage yet. If the fund experienced such significant losses after 10% market decline, imagine what would happen in 2008-like environment.
       
      SJ Options summed it up  nicely:
       
      "It’s very important to alert the public of the true risks involved in short strangles because in the interviews the risk is not discussed as much as it should be.  Because of the excessive media exposure, there are many of retail traders attempting to trade this uncovered options strategy that has nearly unlimited risk potential. The short strangle is not as easy as it appears to be.  Margins change quickly and it’s vulnerable to quick losses and margin calls.  Be very careful with this strategy.  We conducted an 85 year backtest of the short strangle, 45 days to expiration, and it lost money overall."
       
      Tastytrade Response
       
      Tom Sosnoff was asked to respond to Karen Bruton story after the SEC complaint. You can watch his response here (18 minute mark). He continues to defend her, calls her "a very special person" and a victim of an evil government. Tom calls all the publications about Karen "crap". He claims that Karen was actually not paid enough in her fund. However, according to the SEC complaint,  "Between November 2014 and March 2016, Hope collected over $6 million in incentive fees from the HI Fund. As of the same date, the HI Fund had unrealized losses of approximately $57 million." So she took $6M in illegal fees while the fund was down $57M, and Tom says that she was underpaid...
       
      Sosnoff also continues to claim that Karen "made ton of money" for her investors. He still sticks to his claim that she turned $100k into $105M between 2008 and 2011, "forgetting" to mention that most of those profits came from new investors money. God knows his true motives, but this article from 2014 gives some insights into the whole "tastytrade/dough/TD Ameritrade" scheme.
       
      Here are some articles about Karen SuperTrader:
      Karen SuperTrader: Myth Or Reality? Karen The Supertrader by Optionstradingiq A Glimpse of option strategies of Karen Karen The Supertrader Interviewed by tastytrade Karen the Supertrader's Winning Strategy Relied on Fraud, SEC Alleges Karen The Supertrader - SJ Options Tastytrade: A Shill with Skills The Spectacular Fall Of LJM Preservation And Growth
    • By Jeff - EarningsViz
      I would like to introduce earningsviz.com, an options website focused on earnings trades. The thesis behind the website is simple: tail-end risk is mispriced around earnings events; by creating a simple and easy way to visualize this mispricing via analyzing option prices, it allows traders to pick the best strike prices and strategies to enter an earnings trade.
       
      This is achieved by comparing a historical distribution of changes in the stock after earnings against the implied moves of the stock calculated via tight vertical spreads. This comparison yields an edge value that demonstrates whether a stock is fairy valued, or more favorable for option buyers/sellers. A more detailed explanation of the methodology can be found here.
       
      Currently, EarningsViz is in a beta mode so all the information is available for free - the companies listed are all reporting next week (updated every Thursday/Friday). In the future, there will be a subscription required for accessing the information, and I plan on giving SteadyOptions users a discount.
      Also, I plan on adding strategies and trades for pre and post earnings soon.
       
      I am open to feedback/questions on the site as well as features you would like to see added, so let me know what you think!
       
       
       
       
       
       
    • By Jacob Mintz
      (My full options education article on why buy-writes have the exact same risk/reward as selling naked puts is at the end of this article.)

      The second reason I closed the position was there was a chance that SE would report earnings during the May expiration cycle. That would potentially bring another layer of risk to our May buy-write position. As you can see in the graphic below my options trading tool is estimating earnings will be reported the Wednesday before expiration, which would certainly keep the value of the buy-write high through earnings.



      Another way I can determine when a company is due to report earnings is by comparing the volatility of the options each month. The volatility/price of options in the reporting month is higher than the months before and after earnings. Here is an example using Zendesk (ZEN), which will report earnings tonight:

       

      What you can see in this graphic is that with the options expiring May 17 option volatility is 56.17, way more expensive than the June 21 option volatility, which is 41.77. In essence, the price of options/volatility is telling you that ZEN’s earnings are in the May option expiration.

      Now let’s circle back to SE. Yesterday, the May option volatility in SE was significantly more expensive than June. And because of that I assumed that SE would report earnings in May.

      However, based on a trade today, and how the options market is reacting to this trade, I now believe that SE’s earnings will come during the June expiration cycle, not May. First, here is the trade:

      Seller of 7,500 Sea (SE) May 25 Calls for $1 – Stock at 25

      Buyer of 7,500 Sea (SE) June 25 Calls for $1.90 – Stock at 25

      This trade, and the subsequent volatility shift, would lead me to believe earnings are now in June. As the graphic below shows, the May volatility is down 6.7 points and now below the June volatility. Yesterday the May volatility was approximately four points higher than June … and today June is now 2.5 points higher than May (48.8 vs. 46.19).

       

      The earnings date for SE is still not confirmed. However, by paying attention to the price of options/volatility you can get a good read on when the options market is predicting a company will report.
       
      Below is an options education article I wrote several years ago demonstrating that while Covered Calls/Buy-writes are considered a safe trade, and Naked Put Sales are perceived to have high risk, at the end of the day they have the EXACT same risk/reward. 

      Buy-Write vs. Naked Put Sale

      Buy-writes, also known as covered calls, are one of the general public’s most popular options trading strategies. Selling naked puts (the sale of a put in an stock or index without a stock position), on the other hand, is feared by the general public as it’s considered to have much greater risk than a traditional buy-write. But when you break down the profit and loss potential of the two strategies, you can see that they’re identical.

      Let’s start by looking at a buy-write/covered call:   

      A covered call is a strategy in which the trader holds a long position in a stock and writes (sells) a call option on the same stock in an attempt to generate income. Because the trader sold a call against his stock position, his upside is now limited.

      For example, let’s say you own 100 shares of Alcoa (AA), which is currently trading at 13.99. You then theoretically sell one AA July 14 Call (expiring 7/19/2014) for $0.51 for each of your 100 shares.

      Let’s take a look at a few scenarios for this trade:
      In this scenario, AA shares trade flat for the next month and the stock stays below the 14-strike price. At this point, the options you sold will expire worthless, and you will have collected your full premium of $0.51 per share ($51). Thus you will have created a yield of 3.78% in one month’s time.
        In this scenario, AA shares fall to 13.48. At this point, the options you sold will expire worthless and you will have collected your full premium of $0.51 per share ($51). However, your 100 shares of AA will have lost $51 of value. Thus, you are breakeven on the trade. At this time, you could simply sell the next month’s calls against your stock position.
        In this scenario, AA shares fall to 13. Once again, the options you sold will expire worthless and you will have collected your full premium of $0.51 (or $51). However, your shares of AA will have lost $99 of value, leaving you down $48 on the trade. At this time, you could simply sell the next month’s calls against your stock or exit the entire position by selling your stock.
        In this scenario, AA shares rise above 14. At this point, the owner of the 14 calls will exercise his right to buy the stock from you. This will leave you with no position. However, you have collected your $0.51 (or $51) and made $0.01 on the stock position.
      Here is the profit and loss graph of this trade:




      Now let’s take a look at the scenarios of selling a Naked Put in the same stock. (Remember, selling naked puts is the sale of a put in a stock or index without a stock position.) With stock AA trading at 13.99, we could sell the July 14 Puts (expiring 7/19/2014) for $0.51.

      Let’s take a look at a few scenarios for this trade:
      In this scenario, AA shares trade flat for the next month and the stock stays below the 14-strike price. At this point, the options you sold will expire in the money, and you will have collected your premium of $0.51 per share ($51). Now you will be long the stock, but will have created a yield of 3.78% in one month’s time. At this time, you could simply sell the next month’s calls against your stock position.
        In this scenario, AA shares fall to 13.48. At this point, the puts you sold will expire in the money.  Thus you will buy the stock at 14.  However, since you collected your full premium of $0.51 per share ($51) this makes up for the loss on the stock. Thus, you are breakeven on the trade. At this time, you could simply sell the next month’s calls (switching to a buy-write now that you own shares) against your stock position.
        In this scenario, AA shares fall to 13. At this point, your puts are in the money so you will be forced to buy the stock at 14. You will have collected your full premium of $0.51 (or $51). However, your shares of AA will have lost $99 of value, making you down $48 on the trade. At this time, you could simply sell the next month’s calls against your stock or exit the entire position by selling your stock.
        In this scenario, AA shares rise above 14. At this point, the puts you sold will expire worthless and you will have collected your full premium of $0.51, or a yield of 3.78%.
      Here is the profit and loss graph of this trade:



       
      So what jumps out about these two charts? They are absolutely identical! The most you can make is the same, and the most you can lose is the same.

      We can go through this exercise hundreds of times but each time the profit and loss graphs will be identical. Thus, executing a buy-write is “synthetically” identical to selling a naked put.

      Jacob Mintz is a professional options trader and editor of Cabot Options Trader. He is also the founder of OptionsAce.com, an options mentoring program for novice to experienced traders. Using his proprietary options scans, Jacob creates and manages positions in equities based on risk/reward and volatility expectations. Jacob developed his proprietary risk management system during his years as an options market maker on the Chicago Board of Options Exchange and at a top tier options trading company from 1999 - 2012. You can follow Jacob on Twitter.
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