Is There a "Correct" P/L Graph?

[cuegis 683]

In many, or almost all, of our discussions regarding "Earnings" trades, especially, using the available P/L graphs to see where our zone of profitability will be when holding through earnings,...it is usually said to disregard the P/L graphs during these unique periods because they just do not accurately account for the huge changes , and the huge "difference" in changes, of IV, pre and post earnings.

This statement has shown itself to be pretty much correct.

The over-inflated, front expiration, will almost always collapse by a MUCH greater amount, than the decline of IV as you go further out in time.

This leaves us with "faulty" expectations of  what our outcomes will be when holding through earnings.

In the period before earnings,when the front (short) IV is like 85, and the further back (long) IV might be 40, you will see a P/L graph that shows an enormous range of profitability, sometimes keeping the trade profitable with a 10%+ move in either direction.

Then what happens is, right after earnings, when all IV's have declined to where they are going to wind up, you then learn that the trade REALLY was NOT going to be profitable across the wide range that you were led to believe by the P/L graph.

My question is...with SO MUCH sophisticated options analysis software available, does anyone know of a REALLY good program that can allow for the adjustments (manually) of individual expirations IV's so that one can get a more accurate P/L , that reflects what really will happen post earnings.

I think that we are all smart enough to be able to know the degree of IV changes that will occur, POST earnings, for each expiration to be able to make the correct assumptions, if we had the ability to.

But, the usual candidates (TOS, IB, ONE Option etc.) does not allow for this type of manual , IV, inputs.

 

[dbh21 62]

I'm not sure I am reading this right, but you can adjust the IV of both experations in TOS. So if you are testing a calendar, for instance, you can simulate the IV crush in both chains.

[cuegis 683]

Are you talking about "Analyze" in TOS?

I was just looking at the CRM calendar and , under "Risk Profile" , as always , it showed 2 lines, which I assume, is today, and expiration.

It looked the way all "P/L" risk profile charts always look under "Risk Profile"

Then I started messing with the "lines" button, to see if I could play around with that.

I have no idea what I did but, I screwed up the whole chart, and now it is only showing 1 line, with different % numbers along the left and I have no idea how to get everything back to normal.

Any ideas?

[cuegis 683]

Never Mind!

It was the "Lines" "1 expiration" that I unknowingly changed. But I  fixed it. 

Anyway, where is it that I can manually input the individual IV for each leg pre earnings, and the new IV's post earnings to how what  the normal ,individual, IV crushes, will impact the range of profitability?

With pre-earnings IV's, you will typically see a picture that shows that you will be profitable with an enormous move.

This will turn out to be, not even close to reality, right after earnings, when the IVs settle back to "normal"

 

[dbh21 62]

What you can do in Risk Profile is select the gear icon in the lower right side of the screen under Positions and Simulated Trades. Then if you click "More Parameters" it will give you the option to change the IV for each expiration manually. So if you want the front exp to drop 15% and the back 10%, this is how you would do it. Also you want to move the exiration date to the earnings date or beyond to account for delta.

They don't really help in terms of figuring out how much the vol is likely to drop for each expiration. You would have to look at the historical data for that I suppose. 

[cuegis 683]

Thank you for the guidance. I'm just playing with it now.