Are You Still Selling Premium/Options?

[rygittins 10]

Hello,

 

I'm a new member to SO, about 4 months or so.  I've been trading options for about a year, starting with covered calls, naked puts, and then in the last 8 months trading the whole gambit.  I was doing incredibly well, and have sense suffered some major setbacks selling premium, especially when it comes to earnings plays, which have been my largest losers.  I am running about %80 wins, but my account, as of today, is down about 10%.  Reviewing my portfolio and positions, the largest losses have been from earnings positions that moved well outside expected range, but a few significant losses in between..  Even given the radical moves in the market as of let, I'm up over all, with SO.  Until now, I had been considering playing both ends of the spectrum when it comes to earnings, SO strategy going in and selling premium at the close, but I am starting to think that selling premium might not be viable, given the draw downs and SO's returns and relatively minor losses in a large downturn.  My selling premium strategies definitely lost more than SO in the current environment.  So, as a new trader, I'm just fishing for feedback from people on whether they've been succesful in combining SO strategy and selling premium, or whether they've just abandoned selling premium altogether and, if so, how that has worked out and what strategies complimented SO to make that possible.   I've been loving the huge wins selling premium, but of late the losses make it seem more like gambling, which is not what I want to do...but maybe I'm doing it wrong.  As a quick summary of my premium strategy, I typically do straddles/strangles 15% probability in-the-money, and some Iron Condors around the same probability.  Another question I have is that, by selling so far out-of-the-money, am I not collecting enough premium to offset the portfolio when some positions make a particular move?  From the last year, it seems that moves stay within 1STD, until they don't, and so selling 15%ITM positions is not helpful as when equities move beyond that its usually big and so better to stay at 1STD and collect which will buffer the outliers.  Thank you to anyone who wants to share their thoughts.

 

[Edwin 63]

Just curious, these sound like Tastytrade strategies.  I don't have a problem with them, I watch a lot of Tastytrade, though I can't trade like them.  I would think that selling premium has been difficult with rising volatility in the last few weeks, even if you're short a lot of deltas.  Have you been rolling the untested side, and going inverted on some of your positions?  

[Kim 7,512]

Take a look:

 

https://steadyoptions.com/articles/post/steadyoptions/how-not-to-trade-nflx-earnings-r122

 

I would NEVER sell strangles through earnings. The risk is too high, not to mention extremely inefficient use of margin. One trading surprise like last GMCR can wipe out your portfolio.

[rygittins 10]

Thank you for the replies.

 

Before I heard of SO I followed another service that I have come to learn essentially trades the same as TT.  The last few weeks have been tough with even far OTM calls being underwater even though I sold them at really high IV.  Obviously everything on the put side has been more difficult to manage but luckily I took a lot of positions off before last Monday.  I terms of management, I typically roll up/down the non-tested side to the original delta till I have a Straddle/Fly.  I have not gone inverted adjusting straddles but I have rolled them out if I received a credit.  

 

Thank you Kim for sharing that link.  I have actually looked  at that before and have been slowing down selling less strangles through earnings.  The biggest lesson for me was GMCR - I sold a way OTM and expected move strangle, and every but can guess how that ended...basically 4% of my account. I ended up rolling the put out to December because I couldn't bare the thought of a loss like that but have been pretty uncomfortable being long GMCR, not to mention the margin requirement.  Not exactly a stock I want to be long.

 

I'm slowly repairing my account now and shifting the large majority of my portfolio over to SO and SC strategies.  I have also drastically cut down on selling options through earnings.  After only 3 earnings cycles I became pretty skeptical about the "expected move" being derived from options prices, as Kim points out in his post.  The take away I'm arriving it is that its the unexpected that matters at earnings and that the unexpected can really hurt you.  

 

Thanks again.

[Edwin 63]

What service is this?  Nothing against you, but I would have a hard time seeing a lot of people paying for a service that is already available for free by just going on TT and Dough.

[PaulCao 51]

Hi rygittins, 

 

I like to sell primarily premium; primarily involving short-term calendars on "jumbotron" stocks (reference to TastyTrade's "Shadow Trader") and also delta 15ish 45DTE iron condors on SPX or RUT (I think trade that TT's Liz & JNY likes to put on), 

 

It has been particularly challenging environment of late, my short term calendar trades entered prior to 8/21 has surprisingly broke even (due to the rapid expansion of vol); however, on my SPX and RUT iron condors, my initial put side has been taken out and I rolled down aggressively the untested call side such that I might get some serious whipsaw now if the market decides to go back up, 

 

That being said, I'm still sticking to selling premium especially in this environment. Aside from possibly being stubborn, egoistical and unwilling to change, I manage the risk primarily on position sizing and adjustment and rely on TT's oft-repeated "maximizing the number of occurrences" or being maschiostically willing to be mechanical to enter trades or take a loss when premium selling takes a huge hit, 

 

One thing I do different from TT's dogma is I don't do the inverted, when my calendar or iron condor get tested, I roll down (or up) my untested side and also if RUT or SPX is within 10pts of having one of my side being taken out; I look to buy a option hedge to cut my delta down by 70%; and close the trade for a loss if the market keeps moving against me. 

 

Versus Liz & JNY who pretty much just roll down untested and hold their breached side; and even go inverted if they have to. 

 

I try to limit my loss at 10-15% on losers (of course, keyword on try; the market dictates my loss); I try to close my winners at 20%-25%. And try to limit against gamma risk by trying to close/roll out before the last week DTE or that Monday of, 

 

I also open my calendars sometimes at half size, so I can tack on another wing should the stock move against me to give me more room to adjust, 

 

None of these things helped against a huge market move like 8/21, but I take it as an inevitable part of selling premium; have to get use to a slow and steady grind up followed by huge dips; and on the fly adjustment to keep theta positive and gamma low when things go out of whack. I'm in the same shoes as you are, slowly trying to repair my portfolio now and seeing how I can take advantage of the elevated vol now for the rest of the year, 

 

With all of this being said, I'm curious if Tom Sosnoff is going to bring back Karen the Supertrader now and ask how she fared the "mini-crash", 

 

Best,

PC 

[rygittins 10]

Thanks again for the replies.  One thing I am really enjoying about SO, besides the returns and the hands-on guidance, is that there is an active community and many experienced traders.

 

Paul, thank you for sharing your approach to premium selling.  I have not watched Shadow Trader so I will have to look into trading the "jumbotrons".  Sounds interesting. I have not managed my strangles as aggressively as you, typically between 25-50% (so not mechanical enough)  but I also haven't put on any on in SPX/RUT after reading Kim's comments on the dangers of inherent to Karyn's style.  If I did, it would be rigid 25%.  I too wonder how last week impacted here trading.

 

 I know the MIC Condors from Steady Condors saved me from what could have been atruly devastating losses and am now sold on that service as well.  Thank you too for sharing your specific adjustment strategy, especially cutting delta's with hedges.  I did that last week as well and it was really fruitful; my account is now negative 5% instead of %10, but unlike you, I did it half hazardly without a delta target, just knowing I needed more short deltas, and so really got lucky as there was nothing mechanistic about it.  Fortunately I had the realization that I over hedged and took some off - again, basically gambling.  From this week and these comments, I've learned that I need to get much more mechanistic when it comes to not only managing winners and adjustments, but especially how I hedge.

 

For edboc, I will not mention the service by name because the guy works really hard, but I do think with TT in the mix he is facing a really challenging environment.  He is, however, much more hands on for newer traders, but the strategies are essentially the exact same, and, from my impression, much less complex than SO, allowing one to got it alone a lot sooner, and...well, less profitable by far from my 9months or so with that service.  Hence shifting my capital allocation to SO.

 

Thanks again, everyone.

[Edwin 63]

I think I know who you're referring to without mentioning the name of the service.  This person provides one-on-one mentoring, I've seen his youtube videos.  He seems like a nice guy.

[Kim 7,512]

I want to make one thing very clear: I'm not against selling premium. On the contrary. Most of our trades on SO and SC are selling premium. I believe there is a long term edge to selling premium. I just don't like the way tastytrade do it, which is just blindly selling high IV options through earnings. In fact, i believe that selling premium and holding it through earnings has an edge as well. BUT: the stock selection is very important (stocks like NFLX or AMZN are not good candidates). And I would never sell naked, always hedged (condors or calendars). And of course position sizing is the key. Earnings are unpredictable, and no matter how well you did your research, you should still be prepared to 100% loss.

[TDM 33]

Euan Sinclair did some work on what he calls the Volatility Premium. Basically, he showed that there is a significant long term edge to selling premium on indexes, because implied volatility is, on average, higher than realized volatility. He demonstrated some simple strategies (akin to Karen Supertrader), and showed that they would have produced consistent profits since 2001, even including events like 2008 and last week. He didn't advise these strategies (actually, he advises against them), but rather used them as a "proof of concept" passive strategy, to show the advantages of selling premium. The idea was that you can substantially improve on that performance by doing something like Steady Condors.

 

Interestingly, he found that there is no corresponding inherent edge in selling premium on stocks. There are frequently short term edges on individual securities, as the market often has a bad estimate of volatility, but not the same systematic edge that you find in indexes.

 

If anyone wants to read more, the book is Volatility Trading by Euan Sinclair. It's got good information, but it is definitely one of the more technical/quantitative/academic books I've read.

[rygittins 10]

Thanks Kim, and sorry if I mischaracterized the SO/SC strategies.  

 

Thanks TDM.  That's interesting.  I've been moving more towards selling premium in indexes instead of stocks after trading things life INTL, HPQ, WFM, NFLX, GOOG etc after their huge and/or relentless moves.  Until last week I was hoping that indexes would spare me that kind of pain.

 

I'll put that Sinclair's book on my reading list.  I am working my way through Augen's books right now so hopefully I'll be able to understand Sinclair's when I'm done.

[Kim 7,512]

Thanks Kim, and sorry if I mischaracterized the SO/SC strategies.  

Not at all, on the contrary..

[Edwin 63]

Hi rygittins, 

 

I like to sell primarily premium; primarily involving short-term calendars on "jumbotron" stocks (reference to TastyTrade's "Shadow Trader") and also delta 15ish 45DTE iron condors on SPX or RUT (I think trade that TT's Liz & JNY likes to put on), 

 

It has been particularly challenging environment of late, my short term calendar trades entered prior to 8/21 has surprisingly broke even (due to the rapid expansion of vol); however, on my SPX and RUT iron condors, my initial put side has been taken out and I rolled down aggressively the untested call side such that I might get some serious whipsaw now if the market decides to go back up, 

 

That being said, I'm still sticking to selling premium especially in this environment. Aside from possibly being stubborn, egoistical and unwilling to change, I manage the risk primarily on position sizing and adjustment and rely on TT's oft-repeated "maximizing the number of occurrences" or being maschiostically willing to be mechanical to enter trades or take a loss when premium selling takes a huge hit, 

 

One thing I do different from TT's dogma is I don't do the inverted, when my calendar or iron condor get tested, I roll down (or up) my untested side and also if RUT or SPX is within 10pts of having one of my side being taken out; I look to buy a option hedge to cut my delta down by 70%; and close the trade for a loss if the market keeps moving against me. 

 

Versus Liz & JNY who pretty much just roll down untested and hold their breached side; and even go inverted if they have to. 

 

I try to limit my loss at 10-15% on losers (of course, keyword on try; the market dictates my loss); I try to close my winners at 20%-25%. And try to limit against gamma risk by trying to close/roll out before the last week DTE or that Monday of, 

 

I also open my calendars sometimes at half size, so I can tack on another wing should the stock move against me to give me more room to adjust, 

 

None of these things helped against a huge market move like 8/21, but I take it as an inevitable part of selling premium; have to get use to a slow and steady grind up followed by huge dips; and on the fly adjustment to keep theta positive and gamma low when things go out of whack. I'm in the same shoes as you are, slowly trying to repair my portfolio now and seeing how I can take advantage of the elevated vol now for the rest of the year, 

 

With all of this being said, I'm curious if Tom Sosnoff is going to bring back Karen the Supertrader now and ask how she fared the "mini-crash", 

 

Best,

PC 

Paul, how would you compare your success in return on capital and p&l using those strategies compared to other strategies you are using before the downturn last week?

[rygittins 10]

Although edbc's question is for paul, all just chime in here.  For the first six months or so I was my portfolio was up approx 4% per month...I was feeling really good.  Then some bad plays in INTC, HPQ, WFM, and then, the whammy, GMCR, and oh yeah, WMT.  Combined with 8/21 that put me down about 10%.  With some strong hedges since then, I'm about 5% down.  

 

I probably could've avoided the worst losses by not taking assignment on INTC, WMT, WFM, and HPQ...I thought they would bounce as they were all already down 10%, if I recall, but they just kept going down and down.  In retrospect, if I had just closed the position I would be doing much better right now...I guess at the point I accepted assignment I got into stock picking.

 

My portfolio doesn't really reflect SO/SC returns because I missed out on many of the trades due to lack of computer access to get a good entry this summer.  So, with the computer back and SO/SC trades on, and a little less masochism as Paul says in regards to selling premium, I'm hoping to be back on track by next earnings cycle.

 

Looking at some of Kirks comments on selling options through earnings, it does seem that I did much better on obvious candidates and more or less terrible on what were...in retrospect, terrible candidates.  Fortunately I had been smacked down enough by google earnings not fool around and missed some serious pain for those that sold calls at the expected move.

[rygittins 10]

Just one last thing here.  I did notice a comment from a veteran TT trader on 8/21 saying that his SPY strangle had lost 9 of the last 12 months of profits on that monthly strategy.  That was a reality check.  Especially sense if the market had stayed where it opened it probably would have been 12 months.  That brought to mind the first critique I read of selling premium that it is a zero-sum gain prospect.  Of course, you can do better with adjustments, but it really sank it home for me that a veteran trader of 20 odd years would have such a result, especially considering that, according to my reading, market corrections were much more on an annual basis before the 2011 run up.  

 

This leads me to one last question I've been wondering about since 8/21.  I'm sold on the MICs for the SPX/RUT trades but are the appropriate for indexes like the SPY, IWM, seems so, but more to the point, stocks.  I haven't thought this out yet, and more than likely lack the knowledge and experience to anyway, but maybe it would be an interesting topic to explore in another post for novices.  One idea generated by one of Kim's recent comments on an SPX skewed Iron Condor is whether I should skew many high IV condors to the downside given that dropping IV, ideally, would offset a slow direction move up.  

[Edwin 63]

rygittins, thanks for sharing your experiences.  I have had challenges trading and making any real progress using TT strategies, I spend time watching them, other youtube videos, and following various traders on twitter, and watching way too much cnbc more so for educational purposes, market awareness, technical analysis, than anything.   That's probably not a good idea, i'm often just overwhelmed with data, video, ideas and things to read.  I also often find that non-index ETF products have medium-poor liquidity for options trading unless it's FB, AAPL, TWTR, and a few others. 

[rygittins 10]

edboc..

 

Thank you too for responding too my post.  I must say, I sound like you...since getting sacked from my community college job by the union - don't go against the union - I'm not only trading full-time but reading a ton on options, watching/listening a ton, following traders a ton, and pretty much just immersed 14 hrs a day.  System overload, so much so that i'm getting into analysis-paralysis when trying to go it alone..  That, I guess, for me, will come with experience, I hope.  Market awareness is something I am really aiming for and that TT seems to totally discount, like trading naked earnings on stocks like NLFX.

[Edwin 63]

I have found technical analysis as helpful guides, but nothing more than that.  Moving averages, fib retracements, market profile, etc. are only references on the chart to be aware of.  I would say that the shadowtrader quadbox ($TICK, /ES, $UVOL-$DVOL, $ADVN-$DECN) is helpful in terms of viewing market internals at a glance.  I wish there was a way to view that graphically on a mobile device, and I'd also like to graph the VXV/VIX ratio on a mobile device.  Going long stock is just a painful proposition the last few weeks, unless they are for very short term trades.

Edited September 5, 2015 by edboc

[PaulCao 51]

Paul, how would you compare your success in return on capital and p&l using those strategies compared to other strategies you are using before the downturn last week?

 

Hi edboc,

 

I don't have the exact statics. 

 

So I'll give a bad estimate, for my 45DTE RUT or SPX iron condor, I think I get 40% overall return on margin on these trades. 

 

(I try to enter a 45DTE RUT or SPX iron condor when VIX is high (ideally above 15), with total credit initially collected of about 40% of margin and try to close at about 35% gain on credit or 25% on loss; so basing that I lose 50% with average loss of 25%, win 50% with average win of 35% for 8 total iron condors this year; 8 * 0.50 * 0.35 - 8 * 0.50 * 0.25). 

 

For my jumbontron calendar trades, I think I get also get 40% overall return on margin on these trades. 

 

The edge is small here, only probably 1%. I'd say I probably can get 15% at 60% time and lose 20% at 40% of other time. However I do these trades religiously every week and average about 2-3 of these calendar trades per week. So it's a grind where I entered about 2-3 of these trades every week or 40 roughly of these trades, so grinding them out for 40 trades; (40 * 0.60 * 0.15- 40 * 0.40 * 0.2) = 40%. 

 

(For my short-term calendar jumbotron trades, I try to enter a 2 week to expiration calendar on liquid and big ticker-size AMZN, GOOG, LNKD etc. when the stock is in the middle of support of resistance range and with no catalysts (e.g., AMZN stabilized after earnings). . 

 

So I usually use up to about 40%-50% in my portfolio; so it matches about 17% YTD on my portfolio prior to 8/21 or $5.1K on $30K account; this is of course, before 8/21, where I've lost about 10% since then (5% on VIX call calendar due to my incompetence/overconfidence at over allocating a trade that "will never lose," 5% on iron condors and calendars being taken out). 

 

So in short, I think others can do much better; e.g., SteadyCondors have a much record managing the iron condors and Kim's earning calendars have a greater edge (because it is more forgiving than a calendar entered in a normal period). Also meetings during the day prevent me from adjusting quickly say when the stock gaps higher due to an analyst upgrade or some other unexpected news. 

 

Best,

PC

[Edwin 63]

Thanks for sharing Paul.  How are the calendar trades doing in a higher IV environment for the jumbotron stocks?  Ideally, you'd want calendars when IV is low, correct?

[Guest David]

With regard to selling over priced IV right before earnings. The safest way , with very little risk,that I have found, to do this is....

 ONLY use the most liquid of stocks (options)

Only use stocks that have VERY liquid weekly options.

Then look at the option series that is expiring the Friday following the earnings and see where it's IV is.

Next, look at the following week, and the week after that's options IV.

The 1st telltale sign that there might be an opportunity is when you can sell the front (expiring) week for a much higher IV than the following week, or 2 weeks away.

If you get this far, then then next thing to do is, totally forget about IV and just look at the actual prices of the calendars.

If you can sell the expiring , front week strike, and buy the following week, or 2 weeks away identical strike for as close to zero as possible.

By this I mean calendars that cost like .20 cents, or even .30 cents on a relatively higher priced stock ($50 and above).

So, now you get to sell over inflated, pre-earnings, IV and have a maximum risk of .20 cents per spread.,

I then do, depending on the situation, 1 ATM, 1 below the market,and 1 above the market.

This now leaves me with a maximum risk of .60 cents after earnings are announced, and,more important, it covers a wide amount of price range to be profitable in.

When you can find these, they work VERY well with almost no risk.

I am talking about selling options with as much as $5++ EXTRINSIC value with as little as, 1-4 days until expiration AFTER earnings are announced.

And buying the same exact option, 1 or 2 weeks away, for $5.20

You KNOW that the $5 of front week time value IS going to be zero on Friday.

Then it is just a matter of whether your 1 or 2 weeks option, after earnings, is worth more than .20 or .30 cents.

Way more often than not it is.

By doing 3 of them..... even if you lose .40 cents on 2 of them, you can make as much as $5 on the other one.

[Kim 7,512]

Thanks for sharing David,

 

Could you give an example of a high priced stock where you can get a calendar for 0.20? Also, don't forget that while the maximum loss is 0.20, it is still 100% if the stock moves a lot more than expected. I always perfer to think in percentage terms, not dollar terms.

[Guest David]

This isn't the best example but, a recent one was NKE with earnings after the close on June 28th, 1 week ago.

The July 2 series were trading at 58 IV and the July 9 series was around 45 IV.

The 1 week calendars, at the close before earnings, could have been done for .15 cents, maybe .20 cents at worst.

But, it was a $53 stock and they were, in absolute dollar terms, lower priced options.

I did 3 ...1 below, 1 atm, and 1 above.

It was a small profit..not the best example.

In the past, I have done AMZN, GMCR, LNKD (when those stocks were still alive and at levels $300 or less)  selling $5++ front week, and buying $5.20-$5.30, 1 week out, or maybe .40 cents 2 weeks out,  where these numbers represented 100% "extrinsic" value. 

You KNOW the front week's "extrinsic value" will be zero on Friday. So, it is just a matter of whether a 1 week option (that you are long) winds up being worth more than .30 cents (of "extrinsic" value) right after earnings ,with 1- 1 1/2 weeks left on them.

Yes,, of course if there is a move outside of the expected range you could lose 100% of the .20-.30 cents but, compared to all of the other ways of sitting through earnings with short IV (short strangles, straddles ,etc....the Tasty Trade method of "gambling") at least this way you are not going to put yourself in the position of an "outlier" blowing you out!.

I am making my list for the best candidates for the upcoming July earnings month.

I also would like to join your service. I noticed that you just re-opened it to new subscribers.

I will be joining this week.

 

[Guest David]

What a coincidence.

Just as we are discussing this topic, I received an email from "IVolatility.com" about their " Volatility Kings 2Q 2016 "

http://www.ivolatility.com/roller/page/trader?entry=volume_16_issue_27_br

They prepare a list , every quarter, of unusually high IV stocks as they are approaching their next earnings...including all the additional info (dates etc)

I attached the link to their most recent one for 2nd quarter 2016

[Kim 7,512]

Thanks for sharing.

 

I think looking at high IV alone is a bit simplistic. You need to find stocks that have consistent history of moving less than the implied move. Those will be good candidates for a calendar. In fact, we already started looking at this strategy, as possible complimentary for SO model portfolio, with half allocation. it is possible to find ~0.20 candidates for ~$50 stocks, but I doubt you will be able to find any for $200-300 stocks. If you can, lets us know.

[Guest David]

You mean high IV as determined by IV "Rank" or "percentile"? If IV is compared to anything other than it's OWN history, it has no meaning.

Well, you would expect most stocks to be in that area as they are approaching earnings.

Finding stocks that tend to move less than their "expected" IV implies is a long, hard, tedious project to be done, without the aid of some sort of scanner/filter.

If you had to just do this whole process alone, manually, one at a time, it is a LOT of work.

Do you know of any software, or service, that can make this process less time intensive by filtering out most of the garbage?

I'm guessing IVolatility might have something. They are good with these things.

As for the higher priced (ex. $100- $300) stocks, you are right, it is rare, that you can get a 1 week, or 2 week , calendar, for .30 cents on a $5++ spread.

But, from time to time I do see it.

You need to begin by looking for a huge difference in IV between the 2 expirations.

Generally, the more time between expirations, the greater the difference in IV (right before earnings).

The ideal scenario is when earnings come out after the market on a Thursday (or before Market on Friday) and you can sell the expiring options for overly extreme premiums because the "extrinsic" value will be zero at the end of the day.

I have had success with doing some variation of a triple calendar ( below, at, and above the market), because it covers a wide area. Or, some variation of diagonal's along the same idea.

It works best best when you can do the calendars for VERY cheap....like the ..30 cents I was talking about.

You lose .30 cents on 2 of them and can make $3++ on the other one.

And sometimes you don't even lose any money on the 2 "bad" ones because your longs retain the price you originally paid for the spread as the front expiration loses all of it's time value.

[Kim 7,512]

optionslam.com has all the info that allows you to find stocks that move less than IM on average. We also have a member who wrote a program and is posting charts every week showing history of moves in the last 4 cycles.

[Yowster 8,003]

I agree with most all of the points raised here, and have brought up many of the same things when proposing good candidates for calendars to hold through earnings.   As Kim mentioned, we use several sources to identify stocks that have a history of staying within implied move on earnings.  The one statement that I would disagree with is " If IV is compared to anything other than it's OWN history, it has no meaning. "   While it is important to know a given stock's IV history so you have a good indication of what the post-earnings IV drop will be, IMO the IV in general does come into play in two major ways with these calendars you hold through earnings:

1. The higher the pre-earnings IV, the more of a post-earnings move that can be tolerated and still have the calendar be profitable.   The IV differential between the short and long legs is important too - but you'll almost always see a decent sized differential when you short leg is expiring the same week as the earnings announcement.   A stock with a lower pre-earnings IV%  will see its calendar value go close to zero post-earnings on a much smaller stock price move than stocks with much higher IV%.
2. The higher the pre-earnings IV, the higher the max gain percentage on the trade if the stock winds up near your strike.   Stocks with high pre-earnings IV can have their calendars make 200%+ if you hit the strike and its late in expiration week,  mid-level IV stocks can make around 50-100%, but for lower IV stocks your max gain is much less - and for a cheap 0.10 to 0.30 cost calendars, the 0.o3 typical round trip commission  to open and close makes up a significant percentage of the calendar cost and will consume a lot of the profit.

Edited July 5, 2016 by Yowster

[Guest David]

Take a look at IBM.

Earnings on July 18th.

Right now the stock is around $152.50

You would sell the July 22 series.  You can sell the 155 call for July 22, and buy the July 29 155 call for about .30 cents....or close to it.

If you want to do one below the market as well...the 150 , 1 week calendar is close to .20 cents.

And, if you want to do 3, to widen out your range, you can also add the $157.50 calendar for about .30 cents.

All 3 will cost about .80 -.90 cents total. This is your absolute risk and,  that could ONLY happen if,  the 1 week options that you are long (July 29th series) all have zero time value with 1 week left till expiration , after earnings. The July 22 options you are short WILL have zero extrinsic value on July 22.

The range of profitability is from around 146 - 162.

Maximum gain is over $3.00...maximum loss is .90 cents and that could only happen if your 1 week (long) options have zero time value with 1 week left.

So, realistically....your maximum risk is more like .40 cents. With a huge range of profitability.

[Yowster 8,003]

I agree with all your numbers.  However, note that your range of profitability is within the implied move (based on the ATM Jul22 straddle price the implied move is a little under +/- $8.00).    For a lower to lower-middle IV stock like IBM, it doesn't take too much of a move outside the implied move for the 1-week calendars to quickly contract to low valuations.   Plug values into an option calculator on a 10 point move on earnings and IBM IV falling into its normal 17.5% to 20% range with around 4 days and 11 days left on the expirations - the strikes farthest away are basically at zero and the closest strike isn't worth all that much more.   I'm not saying this is a bad trade for stocks that have a history of staying within the implied move, but a look at IBM's chart shows a few large outsized moves on earnings over the last couple of years so to me IBM is more of a gamble to stay within the implied move this earnings cycle.

 

I do like these hold through earnings calendars, as I've noted quite a few of them in other posts.  Howerver, IMO, I find the best candidates are middle to higher IV stocks that have a history of staying within their implied moves.  These trades typically have higher max gain percentages if you are lucky to have the stock wind up near your strike and also have the calendar values declining slower on outsized moved as compared to stocks with low IV moving more than the implied.

[Guest David]

Yes..I understand, and agree, with what you are saying.

My mistake for not first checking the IV "Rank" or "Percentile" before suggesting this.

I wasn't saying that this was a "great" candidate.

I was just trying to point out an example of how to sell a higher front expiration IV and buy a much lower farther away series IV.

Yes the straddle is the fastest way to gauge the markets expected move.

But, unlike most of the other ways to participate in holding (selling) IV throughout the earnings ( short straddles, strangles, IC etc).....this is the lowest risk way of doing it as your loss is limited to such a small amount. A short straddle could cause you to blow up!

I would NEVER take that risk.

You did a much more thorough job than I did  of going through further research about past "post earnings" moves.

I need to screen a lot more than I did. Especially looking first for 

1- very high IV percentile and

2- a VERY big differential in IV between the 2 expirations.

Although .30 cents is .30 cents!

I wish I had some sort of "screener" to locate exactly what we are looking for here without having to do it manually one at a time.

[Kim 7,512]

IBM is not the best candidate because the implied move is only 5%+, and there is not too much margin of error. I just checked last cycle performance of one week calendar. You could buy it for 0.30, and next day it was worth less than 0.05. That't 85% loss. And even ATM calendar was worth around 0.60. Which is 100% gain - but probability to realize that gain was very low.

[Marat Rabinovich 0]

What about applying the same strategy with NFLX options?

the company earnings are after the close on July 18

[Kim 7,512]

NFLX is too unpredictable and has history of big moves. I would not sell premium for stocks like NFLX.