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kdunaway

AMZN Iron Fly

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I have been thinking of ways to capitalize on straddle that consistently under perform with holding through earnings. @cuegis posted a similar idea for FB. I looked at multiple different setups for an ATM AMZN Iron Fly to holding through earnings. My goal was to have a setup which had break-even points around ATM+/-Straddle price when accounting for expected volatility drop. I used Fidelity's P/L Calculator to estimate this impact. Overall I am more drawn to the Feb 10th expiration over the Feb 3rd as it gives more room for error. The Feb 3rd Iron Fly has about 2.5x the max potential return for similar risk, but the B/E is at +/-80% of straddle price.

Feb 3rd - Best setup I saw was 30 pt wide wings. B/E +/-80% of straddle price. ~375 risk for 26.25 credit, potential return 1750 post earnings. The OI was ok on the wings. Might have to adjust strikes slightly for OI. 

Feb 10th -  30 pt  wide wings, B/E =/-straddle price. 460 risk for 25.42 credit. Potential return post earnings $750. OI was worse than Feb 3rd for wings. My plan is to try Feb 10th with 30 point wide wings placed near close. 

Attached are the generated graphs. I'll update with placed trade.

 

 

 

AMZN Iron Fly 2_1 eval.docx

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Interesting to see how this plays out versus holding a calendar thru earnings, as both should profit by a move of less than the implied.  For stocks that typically stay within the implied I've always liked the calendar because the IV drop hits your short log more than the long.   You don't have that with the flys, but then again I've never played them thru earnings so I don't have any practical experience with how they behave in this scenario.

 

That being said, AMZN is not a stock that typically moves less than the implied so IMO I don't think its best suited for a hold thru calendar or fly.   Over the last 12 earnings cycles it has exceeded the implied 5 times, been right around the implied 5 times, and only 2 times was significantly below the implied.   Realize that this trade is more of a gamble than one with historical trends in your favor:   Here is the earnings history with the move vs implied on the right graph:

 

AMZNearn.PNG

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Interesting. Thanks for taking the time to do the leg-work on this type of trade. This is a new idea for me. SO did some RICs in the beginning of 2016 that just didn't work out. They seem to backtest better than actual results and I'm interested in why/whynot this type of trade is better than a RIC or holding a calendar through earnings. 

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Thanks for the comments. Looks like I was looking at the past history incorrectly with the information I had. I'll still either place the trade or paper trade it to see performance. @Yowster Where did you get the data for the graphs? I'm still in the learning stage and my tools are a little rudimentary. At the least writing this helped me to form the idea, and I will have to think more through hold-thru calendars. I've seen a couple of your posts explaining the thought process. I have the most experience (of my limited experience) with Iron flys in general so it is my go to comfort zone.

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7 hours ago, craigsmith said:

Interesting. Thanks for taking the time to do the leg-work on this type of trade. This is a new idea for me. SO did some RICs in the beginning of 2016 that just didn't work out. They seem to backtest better than actual results and I'm interested in why/whynot this type of trade is better than a RIC or holding a calendar through earnings. 

@craigsmith- My opinion on why it's better to play stock stocks with a history of staying within the implied moves with a calendar (or this type of fly), compared to playing RICs on stocks that typically move a lot.   It's basically risk/reward.  With the RICs you are generally risking 75% to make 25% if you stay withing the implied move for your wings.  So, one losing trade can take 3 or more winning trades to get you back to even (and as we saw a few times last year with Thursday AC/Friday BO earnings reports the loss can get to near max pretty quickly if the stock doesn't move).  With the calendars, the risk/reward is more equal - you are not likely to lose 100% unless the move is huge, and you can make 70%-100% or more if the stock winds up near your strike.  So one losing calendar could be offset by just one winning one.

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6 minutes ago, kdunaway said:

@Yowster Where did you get the data for the graphs? 

@kdunaway- The charts come from marketchameleon.com (click on earnings on the left side of the display after you enter a stock symbol).  The site is free (at least for now) and goes back 12 earnings cycles - and I like the visual chart a little better than the optionslam format (and you have to pay for an optionslam subscription to go back multiple cycles).

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I'm not sure AMZN has an edge, compared to FB. FB does move less than expected after earnings, AMZN does not. Here is the history from optionslam:

 

Capture.PNG

 

As you can see, it does have some wild moves, especially prior to 2016 (this is why I considered it a good candidate for RIC, but in 2016 the behavior was not as consistent). In any case, I would consider it much less consistent candidate than FB.

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Decided to try to paper trade/just track a hypothetical trade out of curiosity in light of the implied move information supplied. I did not get a paper trade to fill in the last minutes. I found it interesting that a 30 point wide Feb 10th ATM (840) iron fly the credit received dropped from ~26 dollars to 24.90 in the last two hours. The price of the wings jumped up and spreads widened. There wasn't much OI there. 

The trade I'll track is a Feb 10th 810/840/840/870 and the same trade with Feb 3rd expiration. If I get time I'll look  at a calendar too for my own education. I think looking at performance when outside/near implied move will be interest to me at least.

AMZN is down 4.43% (802) after hours. 

Edited by kdunaway

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20 hours ago, kdunaway said:

Decided to try to paper trade/just track a hypothetical trade out of curiosity in light of the implied move information supplied. I did not get a paper trade to fill in the last minutes. I found it interesting that a 30 point wide Feb 10th ATM (840) iron fly the credit received dropped from ~26 dollars to 24.90 in the last two hours. The price of the wings jumped up and spreads widened. There wasn't much OI there. 

The trade I'll track is a Feb 10th 810/840/840/870 and the same trade with Feb 3rd expiration. If I get time I'll look  at a calendar too for my own education. I think looking at performance when outside/near implied move will be interest to me at least.

AMZN is down 4.43% (802) after hours. 

Am curious. How is up so far? I guess fine.

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What I have priced out so far is the Feb 10th IBs. All this is just using mid points and not real fills. I could not get a fill at the mid-yesterday on a paper trade. The 20 point wide was up ~1.50 per spread. The 30 pt wide one was up 0.20 per spread. It was heavily dependent on when it was entered. The credits received were a about a 1-1.5 lower at the EOD versus 2PM. The Feb 3rd should be up around 5.00 per spread assuming a 30 pt wide. This is probably assuming a higher credit that could have actually been received at EOD yesterday. All these are in the 10-20% of total profit range depending on which exporations used and aggressiveness 

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5 minutes ago, kdunaway said:

What I have priced out so far is the Feb 10th IBs. All this is just using mid points and not real fills. I could not get a fill at the mid-yesterday on a paper trade. The 20 point wide was up ~1.50 per spread. The 30 pt wide one was up 0.20 per spread. It was heavily dependent on when it was entered. The credits received were a about a 1-1.5 lower at the EOD versus 2PM. The Feb 3rd should be up around 5.00 per spread assuming a 30 pt wide. This is probably assuming a higher credit that could have actually been received at EOD yesterday. All these are in the 10-20% of total profit range depending on which exporations used and aggressiveness 

Did you play the calendar?

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