Strangle on GMCR Earnings

[ausstone]

I just wanted to write about a  strategies that I've been playing throughout the year. I'm interested to see what Kim and others say.

 

I opened a GMCR strangle yesterday (I always open the day before the earnings).

 

I bought 10 August 07 60 puts

I bought 10 August 07 97 calls

 

The strangle cost 0.25 with a maximum loss of $250.

 

I only trade this strategy on stocks that have a high predicted move after earnings.

 

GMCR is now at $53.70 (6:39PM). ~$6500 in profit depending on what happens at the open.

 

So why shouldn't I continue to make these trades? I lose more often when I just purchase calls and puts, but the strangle usually does me good.

 

 

Edited August 5, 2015 by ausstone

[Kim]

Let me ask you two questions:

 

1. How many times stocks move 30% after earnings?

2. Did you read my daily update today and the daily tip included in it?

 

The short answer is that if you do it with small allocation and are well aware that 90% of the time (at least) you will lose 100% of your money, you can continue dong it. Just don't call it trading, it's more like gambling to me.

[ausstone]

Well I don't ever think it's going to be a 30% move - that was just luck. I setup the trade looking for $200-$500 in profit with not much risk. My TSLA strangle was 3.19 and hopefully will be worth 4.20 in the morning - that's the kinda moves I'm looking for.

 

Yes, I saw your daily tip which is why I wrote here, and yes a small allocation - I consider out of the money puts and calls more of gambling. But not a strangle.

[Edwin]

Let us know how you do with this over a long period of time. It is a low probability game, comparable to watching unusual options activity and buying low delta premium. I guess your odds are better than the lottery or a scratch ticket, good for you on this big winner.

[Kim]

The stock was trading in 76-77 range today. With 60/97 strangle, you needed around 20%+ move on the downside and almost 30% on the upside just to break even. How is it not much risk? It might be not much risk in dollar terms, but the risk to lose the whole premium is still very high.

Which strikes have you used for TSLA?

[ausstone]

I entered yesterday, and I exit the day after earnings. I don't need +20% or -30% to break even - only if I held until expiration. The screenshot shows that.

 

TSLA I used 237.5/300.

[Kim]

With TSLA now at 255 and only one day left to expiration, I don't think 237 put is going to have much value tomorrow. Definitely not 3.19

[ausstone]

So how has OptionsHouse gone this long and not been sued - if you are right? See the attached screenshot.

Edited August 5, 2015 by ausstone

[Kim]

Because they assume that IV tomorrow remains the same as today. But this is not the case as we all know.

[ausstone]

Sure, I'll update you on the positions when I close them.

[Kim]

One general rule is never rely on the P/L charts when it comes to earnings trades.

[TDM]

In order to get accurate P&L charts through earnings, you need to model the one-day volatility crush associated with earnings. Unfortunately, most options software (including what brokers provide) is not equipped to accurately model this volatility. You generally can't do it yourself on their platform even if you decrease the IV, because it decreases it across all options equally. If you broker lets you model changes in IV for different option chains, you might be able to do it, but then you need to know how to model it, which is itself a challenge.

 

There is some software (OptionVue and the spreadsheet that's included with Exploiting Earnings Volatility are the two I know of) that does model the IV collapse with reasonable accuracy, but even then it is difficult to come up with profitable options trades.

 

In order to employ earnings trading as a profitable strategy, you need some kind of edge over the market. You either need to be better than the market at predicting volatility (size of move), direction of move, or at finding pricing discrepancies within the option chain. I've been working on it for several months now. I do think it's possible, but neither easy nor for the feint of heart.

[Kim]

Very good points!

 

I believe that generally speaking, options are overpriced before earnings. So selling them should have an edge.

 

However, the devil is in details. For example, I would never sell naked options like tastytrade advocates. I would do with condors, flies or calendars. Second, you need to carefully select the stocks. tastytrade continue selling NFLX and AMZN and get burned cycle after cycle. Those are among the few stocks that you would be better with buying options before earnings.

[Edwin]

After trying to trade several earnings cycles of trying to sell and buy premium, and also holding shares through earnings (even with a collar hedge), I'm beginning to realize that it's a fool's game/amateur hour and it is a bad way to manage risk in a portfolio.  You can't get consistent results whether or you're buying or selling premium, and the market reaction to the numbers, company's revised guidance, analyst's interpretation of the results, etc. is completely random.  You could think that it is based on the market's expectations on the upcoming release.  Even if someone gave you the revenue and EPS before the release, you'd still have a hard time knowing how the market will react to it.

[ausstone]

I closed GMCR @ 5.91

[BobS]

Ausstone. Maybe I missinterputed your last post but did you say you closed the GMCR strangle for 5.91 and bought it for .25 ? 

[ausstone]

Yes, that's correct.

[luxmon]

I closed GMCR @ 5.91

 

Good job, nice to hear real life examples of people who profit from taking the other side of Sosnoff's trades.