Transforming a strangle into an IC over earnings?

[smt1]

Saw this article on SA today: http://seekingalpha.com/article/873811-a-really-efficient-options-play-over-earnings

Intrigued me as the first part seemed similar to the long straddle/strangle to pickup IV gains technique we use, although the author uses wider strike strangles (which seem like it'd be harder to pickup gains from the stock moving) that form the edges of an IC built later on (the second part of the author's technique)

Anyone have any thoughts on the article?

[Marco]

Saw this article on SA today: http://seekingalpha....y-over-earnings

Intrigued me as the first part seemed similar to the long straddle/strangle to pickup IV gains technique we use, although the author uses wider strike strangles (which seem like it'd be harder to pickup gains from the stock moving) that form the edges of an IC built later on (the second part of the author's technique)

Anyone have any thoughts on the article?

The 1st part of the strategy is based on what we are trying to do here - buy options and hope for IV rise and/or a move to profit from gamma. The way he sets it up though with a wide strangle means that he'll lose more on theta than we would (as we're usually going for a straddle or the tightest possible strangle) but in exchange will profit more if IV rises and/or the stock moves a lot.

The 2nd part has all the know risks and rewards of holding a short option strategy though earnings (big move will hurt you, but you profit from IV collapse) doing it with IC's limits your risk. As options tend to be overpriced ahead of earnings this is a valid strategy. One problem is that 4 legged strategies are going to be expensive to trade (commissions) especially if you need to adjust your strangle strikes before earnings day to be more delta neutral. That means you either pay a lot of commissions or you are restricted a a few 100$+ names where commissions become more reasonable.

[Kelly Park]

I would like to see some more discussion of this strategy. As deeply as SO delves into the IV rise prior to earnings, I have felt that we should be taking full advantage and playing the IV collapse also. With backtetsing to determine the strategy with the highest likelihood of success, I think we could then improve that success rate by playing only those stocks that had a significant IV rise prior to earnings (which we know from tracking our pre-earnings trades). Basically, I think we can turn many of our winners into doubles, and offset our losers much more effectively.

Has anyone already done some backtesting of short ICs through earnings? Kim, Chris, I'll bet you have already looked into this.

[Kim]

I placed a comment on the article. With much wider strikes than we usually do, you really need a decent move before earnings, otherwise the IV increase is not likely to offset the theta.

[Kelly Park]

BTW, I'm not advocating the first part of the strategy. I think we do that better already. But I am intrigued by the second part, playing the IV crash.

[Kim]

I would like to see some more discussion of this strategy. As deeply as SO delves into the IV rise prior to earnings, I have felt that we should be taking full advantage and playing the IV collapse also. With backtetsing to determine the strategy with the highest likelihood of success, I think we could then improve that success rate by playing only those stocks that had a significant IV rise prior to earnings (which we know from tracking our pre-earnings trades). Basically, I think we can turn many of our winners into doubles, and offset our losers much more effectively.

Has anyone already done some backtesting of short ICs through earnings? Kim, Chris, I'll bet you have already looked into this.

Kelly,

I know that Chris is doing it on a regular basis. However, we need to remember that this is still a speculative trade. You can do all the backtesting you want, but if the stock doesn't behave according to the previous patterns and makes a large move, you are looking at 60-80% loss. Obviously I cannot recommend those trades for the official SO portfolio, but we can feature them in the speculative forum.

BTW, I personally prefer to play the IV collapse with calendars. Again, we can do some of both and compare the results.

[Kelly Park]

I don't think I have seen a discussion of using calendars for post earnings IV collapse. I thought the potential large move in the underlying would hurt them even more than a wide IC. But if that works, I'm interested in understanding that play also. I just hate to not use what seems to me to be the most predictable move in the market (post earnings IV collapse, if there was a pre-earnings IV rise) for some kind of trade.

[EricSimpson1]

I don't think I have seen a discussion of using calendars for post earnings IV collapse. I thought the potential large move in the underlying would hurt them even more than a wide IC. But if that works, I'm interested in understanding that play also. I just hate to not use what seems to me to be the most predictable move in the market (post earnings IV collapse, if there was a pre-earnings IV rise) for some kind of trade.

Chris has posted about doing something like this. It was mentioned in this thread: http://steadyoptions.com/forum/topic/322-holding-thru-earnings/

If you compare the implied moves right before earnings to historical moves of the stock after the results come out, it will give you a better idea of what type of trade(straddle, IC, calendar) to hold through earnings. You can probably be successful with this as long as you make sure commissions don't take away much and your allocation is small.