The Tasty Trade Method......aka" Earnings Comedy"

[cuegis 683]

I received an email from the TT people today. It was recapping today's segments.

I could not believe what I was reading, and you will feel the same way too.

It was a specific recommended "Earnings calendar" trade from Liz and Jenny.

Basically they are suggesting to do the exact opposite of what we do here.

Specifically, the trade is for COST, which is trading at 167.50 and has earnings March 2 AC.

Here is the trade.

Sell the Feb 24th ATM Put ( 17 DTE) and 

Buy the March 3 ATM Put  (24 DTE).

Pay $1.00

Now, just look at what they are doing.

They are selling the week BEFORE earnings with an IV of 12%

And buying the DAY AFTER EARNINGS at 18% IV.

Can someone tell me if they can see a way where the probability of making a profit is greater than 0%?

 

Here it is....

" Liz and Jenny aim to trade a COST earnings set up calendar. They are buying the ATM Put in the March expiration with 24 days and are selling the same option in the February expiration with 17 DTE. Hoping to pay about a dollar for the calendar, it will take advantage if volatility increases as the earnings date approaches. "

No it won't!

 

[Kim 7,512]

It could work - if COST doesn't move. It it does, the calendar will be toast.

[cuegis 683]

1 hour ago, Kim said:

It could work - if COST doesn't move. It it does, the calendar will be toast.

But that is the case with ALL calendars ...whether it is an earnings calendar , or not!

Their suggested trade did not provide any reason for an " edge".

It also begins with a "negative edge" ......selling 12% IV and buying 18% IV.

All calendars hope for the underlying to stay still, but "Good" calendars have some extra ingredient to provide an edge.

Like your "pre-earnings" calendars.

[Kim 7,512]

Not all. Our per earnings calendars are much more resilient.

[dbh21 62]

My initial reaction is that this trade is predicated on the fact that for many stocks, they quiet down before earnings. 

Ok - here is a 5min test on COST. 

 

Well - that is not too shabby.I'm actually a little shocked given where it came from. These are for 1 week calendars. The flat lines show that the calendar was closed (and the price didn't change.

 

[Kim 7,512]

Was it for Aug 2016 cycle (earnings on Sep29, so Sep29/Sep30 calendar)?

 

I believe you are getting those results because your software is looking at ATM calendar value every given day. So the strikes change. I just backtested the calendar for that cycle, and depending when you entered, the loss varied between 30% and 90% because the stock moved. Unlike our pre-earnings calendars, this setup is not resilient to stock move, and COST can easily move 3-5%.

[cuegis 683]

12 hours ago, Kim said:

Not all. Our per earnings calendars are much more resilient.

Because both legs occur AFTER earnings, so the leg you are selling is always the most inflated and the vega inflation rarely keeps pace with the theta decay.

[cuegis 683]

After I left this original post, I went to their video describing the whole thing.

I don't know about you but, from the written part, I was under the impression that they were planning to exit the trade BEFORE earnings.

I probably assumed that because it is so ingrained in my thinking at this point.

But, after listening to them talk, it WAS meant to HOLD THROUGH earnings.

This, IMO, makes any chance of success nearly impossible.

It would have to do what ANY calendar, under any condition ideally has to do, which is to not move (the underlying).

So, why is this alleged to be any different, or any better, than any earnings, or non- earnings, calendar?

Where are they suggesting the "edge " is coming from?

[Yowster 8,023]

With all calendars, the amount of stock price movement that can be tolerated and still have the trade be successful is based on the IV of the options - the higher the IV the bigger the move that can be tolerated.   This is why our pre-earnings calendars can tolerate much larger moves - because the IV of both legs is much higher than during non-earnings time.   COST is a fairly low IV stock and the spike going into earnings is not that high - so for this trade to be successful the stock price cannot move too much.   I think the "edge" they think they are getting is betting on the long leg's IV to increase as earnings date approaches, but with the short leg expiring before earnings any bigger stock price move would turn this calendar into a loser.

 

Also interesting that @cuegis looked and said this trade was meant to hold through earnings - how can that be when the short leg expires prior to earnings???   Unless they are talking about just holding the long leg?

[cuegis 683]

7 minutes ago, Yowster said:

With all calendars, the amount of stock price movement that can be tolerated and still have the trade be successful is based on the IV of the options - the higher the IV the bigger the move that can be tolerated.   This is why our pre-earnings calendars can tolerate much larger moves - because the IV of both legs is much higher than during non-earnings time.   COST is a fairly low IV stock and the spike going into earnings is not that high - so for this trade to be successful the stock price cannot move too much.   I think the "edge" they think they are getting is betting on the long leg's IV to increase as earnings date approaches, but with the short leg expiring before earnings any bigger stock price move would turn this calendar into a loser.

 

Also interesting that @cuegis looked and said this trade was meant to hold through earnings - how can that be when the short leg expires prior to earnings???   Unless they are talking about just holding the long leg?

 

 

You are right. That was my mistake interpreting it.

I guess I have a method that I am so used to at this point, I just can't find any edge that comes close to the edge that we have, for the reasons you mentioned.

The resilience is one of the major "edges" in our method, plus several other benefits.

Edited February 8, 2017 by cuegis

[dbh21 62]

Test post - please ignore

[dbh21 62]

Test Image Post

[dbh21 62]

Sorry for the extra posts - I am having technical issues with the website. Not sure WTF is going on

12 hours ago, Kim said:

Was it for Aug 2016 cycle (earnings on Sep29, so Sep29/Sep30 calendar)?

 

I believe you are getting those results because your software is looking at ATM calendar value every given day. So the strikes change. I just backtested the calendar for that cycle, and depending when you entered, the loss varied between 30% and 90% because the stock moved. Unlike our pre-earnings calendars, this setup is not resilient to stock move, and COST can easily move 3-5%.

 

No. that is not how my software works. That is how the RV charts work, but not the backtesting. I open a trade and follow it through. I do not adjust the strikes unless there is a rule to do so. I just double checked my data against ThinkBack in ToS and it looks correct.

However, there was sort of an error. I didn't update the earnings data I have, and most of it for what I posted was for 2015. The charts just posted are the last 4 quarters. There are definitely a few near 100% losses in there.

But that RV chart is pretty sweet. I mean - its what we want to see with calendars.

The 4th chart is just the Sept16 cycle isolated since that is what you asked about. Also, you can see a snapshot of the trade data. You should be able to look at this and compare it with the data in TOS pretty quickly. The top row shows a Double Calendar opened on Feb5/16 followed through to its expiration.

Let me know if I misunderstand this trade
 

 

 

[Kim 7,512]

So basically your charts confirm what I suggested: if the stock stays close to the strike, you can get a nice winner. But all it takes is 3-5% move - and it can easily lose 50-90%.

[dbh21 62]

Yes. That's what I see. That big drop in the Sep cycle was from a 5% move.