Predicting Stock Direction After Earnings Announcement?

[tjlocke99]

As I write this I am pretty sure I already know the answer, but I was wondering if anyone has tried to this based on indicators like volume, OI, IV increase on just the Put or Call side, etc., and if they had any success? I know the IV crash would be a major issue with being directional anyway, but regardless knowing if anyone had any success in this area could be helpful.

Thanks.

[Marco]

As I write this I am pretty sure I already know the answer, but I was wondering if anyone has tried to this based on indicators like volume, OI, IV increase on just the Put or Call side, etc., and if they had any success? I know the IV crash would be a major issue with being directional anyway, but regardless knowing if anyone had any success in this area could be helpful.

Thanks.

I know Eric Simpson posted a while ago that he tried to predict the direction after earnings ahead of reporting date and placed bet accordingly, can't find the post though. I'd be impressed with everyone who can get to a significantly higher hit ratio than 50% on the long run though

[Rogers]

What I was interested in was the relation between an IV crash prior to the close before an earnings announcement and the further IV erosion the day after the release.

[Marco]

What I was interested in was the relation between an IV crash prior to the close before an earnings announcement and the further IV erosion the day after the release.

don't think there's a simple formula but as long as the move on earnings day is roughly what was priced in or less I would estimate for vol to drop to HV vol plus a risk premium. Big question is what HV to take (10d, 30d ...) and how high the risk premium is. If you have TOS you can look back at the front month vol of the options that expired before the earnings day to get a good idea (that is if VIX hasn't doubled or halved since or the company had some other major announcements of course)

[EricSimpson1]

I know Eric Simpson posted a while ago that he tried to predict the direction after earnings ahead of reporting date and placed bet accordingly, can't find the post though. I'd be impressed with everyone who can get to a significantly higher hit ratio than 50% on the long run though

It's in this thread: http://steadyoptions...-thru-earnings/

Did simulated trades with either puts or calls, but I lost money in the long run due to IV collapse. I've concluded that getting the direction right does not matter nearly as much as managing the potential profits/losses. In that thread, Jig mentioned using bear call and bull put spreads. I think that bull call and bear put spreads might work even better. You structure the trade so that the potential profits are at least 1.25 times the size of potential losses. If you get it right, hold until the max profit has been reached. If you get it wrong, get out immediately. Obviously you will need a little extra movement in the right direction when the max profit is larger than max loss, but if historical moves have exceeded the required move for max profit in at least 9 of the last 10 cycles, then it should be worth doing. With 50% accuracy, this strategy could be profitable. Options should also be very liquid (< 5% difference in bid/ask spread).

I've only done this on 3 companies so far: HPQ (+98%), CRM (-79%), ADSK (+84%). Our IV earnings candidates are also the best candidates for this strategy.

Edited September 5, 2012 by EricSimpson1