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@FrankTheTank I don't have the screenshots for FDX but pulled it out of the Ratio calculator and waited a day to get in, I believe at T-10.  The 90/40 40/10 both looked good and I wanted to try a double ratio specifically, I was trying to find a trade that would work with two.  I had to fiddle the strikes a little to get them to work out to close to delta neutral and the P&L graph sloping up about evenly on both sides.  I was expecting stock price movement because FDX had been really active, and had set my exit to a nearer T-x but wanted to be out no later than T-1.  I stayed in because of the little bump in RV there at the end and got out at T-1, but FDX didn't really start moving till I closed and by then theta had killed me.  I don't save the screenshots because I have no way of tagging them to a database entry yet but that's coming.  This probably isn't very helpful, should have written it up when I did it.  I've come to an obvious conclusion, kind of a "deja duh" situation, when I realize I'm doing the same stupid thing over again, that is entering too early and getting eaten by theta.  But that's how I learn, an ass whipping always stays with you longer than a gentle suggestion.

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Aristotle: "For the things we have to learn before we can do them, we learn by doing them"

Thomas Jefferson: "What we learn to do, we learn by doing"

Richard Branson: "You don't learn to walk by following the rules. You learn by doing, and by falling over"

@Ringandpinion: "An ass whipping always stays with you longer than a gentle suggestion"

 

I think the later captures it most succinctly :D

 

 

On 12/19/2020 at 6:48 AM, FrankTheTank said:

I think what you are saying is the current RV slope is more important than median historical levels.   I have seen that in my calendar trades where RV of the current cycle seems to follow its own path and does not care too much about median historical RV. 

I suspect the market maker algos know where they want option prices to be at T-0 and make daily adjustments accordingly.  

I still get nervous buying a position knowing I am paying more than average RV for it. 

That's pretty much it...and keep the nervousness but reorient it to being uneasy about paying an RV that is up or sideways because you know that its going to snap back to trend at the worst possible time.

 

 

NB. My theory on t-0 RV is that its not much more complex than a consensus estimate of the value of the post-announcement straddle move. Some loose poking at numbers seemed to suggested that there was some sort of relationship that included recent t-0 RVs, the most recent straddle result and to a lesser degree VIX...ie. take recent RVs as the starting point and then adjust up or down based on the last straddle result (maybe weight the adjustment by the surprise factor of the earnings). It felt like VIX/announcement day come into it as the t-0 RV would be the sum of earnings move + x remaining regular/non-earning trading days....of which VIX would scale up the non-earnings IV.

 

Im sure that there is a workable formula in there somewhere but for all the testing/elasticity measurement and tweaking its probably not worth the effort when MS Paint and a straight line seems to get 90% of the way most of the time.

Edited by gf58

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Can anyone help me model a NFLX hedged call ratio.     My model looks too good to be true. I know @Yowster will tell me to consider negative RV but I moved the time forward to January 15 to account for theta decay which I think helps.

 

 

I bumped IV up by 70 pts which seems conservative based on prior cycles.   Here is chart in TOS:

image.png

 

Here is the chart in ONE

image.png

 

Here is prior IV moves for Tuesday earnings

image.png

 

 

Edited by FrankTheTank

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12 minutes ago, FrankTheTank said:

My model looks too good to be true.

It looks like a regular ratio trade, I get the same graph you get after adding in the IV and date.  I'm shying away from the ratios right now or any other trades that are looking to increasing IV for profitability, I closed 4 trades this morning that were just slowly loosing money and looking to lose more, a couple of which showed good IV increase on the backtester, IV increase that wasn't happening.  I don't think you can depend on increasing IV much to help the trade right now.

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@FrankTheTank Your IV adjust of 70 looks way too high IMO.   Earnings is Tuesday, so IV rise will be less (as less negative theta to compensate for), and the last 3 Tuesday cycles had IV rises of 67, 20, 93 (sky high VIX cycle) and 45.    Factor out the sky high VIX cycle and you have a lot of variance, but 70 doesn't seem like an IV rise amount to use for your estimate.   That said, typical RV decline isn't really high, so if you use a shorter-date call hedge you should be able to minimize downside risk.

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Using @gf58 formula you get this kind of spread for the IV on the date before earnings:

image.png

As @Yowster avers barring the extreme VIX ending in April 2020 you wont get the IV push you are looking for. Based on the above I would suppose an IV of around 91% on the day of earnings is reasonable. If you presume Jan 15 instead its much worse:

image.png

My guess would be around 57% IV. That would give you this return picture - perhaps your ardour will be cooled?

image.png

Edited by TrustyJules

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Now looking at January 16 at an exit date and excluding the high VIX cycle and only looking at Tuesday expirations I see the lowest IV as being 133 on T-0 which would be a rise of 87 pts from current IV levels.   Assuming I can only get 60 pt rise before exiting on the that day the same trade but as a 1:2 ratio I get the mythical "risk free trade" setup:

 

 

@Kim - did you change something on the forum?  I cannot see to paste images into here from my clipboard.  I will try to restart my computer and see if that helps. 

rf.JPG

Edited by FrankTheTank

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4 minutes ago, FrankTheTank said:

How did you quickly calculate the historical IV rise from current date?  Did you do it manually or is there some chart or information in VolHQ I am missing? 

Quick manual check, I looked at the individual cycle lines on the VolHQ straddle IV chart (same chart you displayed)

10 minutes ago, FrankTheTank said:

Now looking at January 16 at an exit date and excluding the high VIX cycle and only looking at Tuesday expirations I see the lowest IV as being 133 on T-0 which would be a rise of 87 pts from current IV levels.   Assuming I can only get 60 pt rise before exiting on the that day the same trade but as a 1:2 ratio I get the mythical "risk free trade" setup:

 

T-0 is Jan19, not Jan16.   Here is a Pnl chart with Jan19 and your IV adjust of 60 pts..

image.png.93b782c61debb22af54a3212faddcea6.png

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Thanks.  Not sure why I had my dates wrong. 

Here is the 1x2 ratio with a slightly OTM calendar added in.   I am plotting this for Friday January 15 and using a 25 pt IV rise for both expirations.    Looks good if you exit on that day (purple line) unless you get caught with a large move down? 

 

Im still looking for that risk free trade  LOL

image.png

 

Edited by FrankTheTank

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Still messing around with the models and taking small trades to see if things really play out like I have modeled.   Just entered this call ratio in IBM with a put calendar as a hedge:

note my assumptions:

short leg will gain 14 IV pts by January 15, 2021

long leg will gain 11 IV pts by January 15, 2021

screen shot below shows these IV changes on January 15, 2021.   

image.png

image.png

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Sorry @TrustyJules or @Yowster but if you have a minute can you see if my IV model and ratio for WMT makes any sense.

 

Current straddle IV for WMT is between 32-33.    Past Wednesday earnings showed IV for this Friday (T-2) at 55 to 62 so I am going to use a conservative 52 and assume we can get a 20 pt IV boost between now and Friday.   

image.png

 

This is showing a "risk free" trade which never seems to work out that way :)    I suspect with the holiday on Monday maybe I should really be looking at T-3 IVs but I am not sure.

image.png

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1 minute ago, FrankTheTank said:

Sorry @TrustyJules or @Yowster but if you have a minute can you see if my IV model and ratio for WMT makes any sense.

 

Current straddle IV for WMT is between 32-33.    Past Wednesday earnings showed IV for this Friday (T-2) at 55 to 62 so I am going to use a conservative 52 and assume we can get a 20 pt IV boost between now and Friday. 

Yes, I think the holiday screws things up.    When you look at those IV charts for the last week, the bigger spikes leading into earnings week are Mondays.   So, for WMT to compare against prior Wed cycles the equivalent of this cycle's T-6 to T-2 is prior cycle T-7 to T-3 (because of the extra day), so the average rise over T-7 to T-3 in prior Wednesday cycles is likely around 5 points.

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@FrankTheTank WMT has often presented itself to me as an attractive ratio - I traded it 5 times, 3 losses, 1 break-even and 1 10% gain. The RV decline from today till the end is around 9% so quite hefty which I think was the problem.

For some reason WMT doesnt seem to want to budge once you enter the ratio 🙂 On the IV side I would rather be very cautious on that - the Vol. HQ % are end of day and generally you cannot get them in a live trade. For safety sake I always look at the day before ending and then add something like halfway to the next day in as a guide.

As regards IV again using the calculator of GF58 I would estimate no more than 45% at the close on Friday.

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19 hours ago, TrustyJules said:

@FrankTheTank WMT has often presented itself to me as an attractive ratio - I traded it 5 times, 3 losses, 1 break-even and 1 10% gain. The RV decline from today till the end is around 9% so quite hefty which I think was the problem.

For some reason WMT doesnt seem to want to budge once you enter the ratio 🙂 On the IV side I would rather be very cautious on that - the Vol. HQ % are end of day and generally you cannot get them in a live trade. For safety sake I always look at the day before ending and then add something like halfway to the next day in as a guide.

As regards IV again using the calculator of GF58 I would estimate no more than 45% at the close on Friday.

Thanks Trusty.   Those pesky IV numbers.   If only we had a way to know for certain future IVs we would all be rich :)

 

I honestly think if we all pooled our money together and bought intraday data for the past 3 years on the top 50 or so stocks that we normally trade we could come up with some very nice looking IV and RV graphs that could give us a real edge when trading these earnings events.

 

VolHQ is great but only taking one snapshot a day at end of day is like driving a car and only looking at the road once every 3 minutes.   You can usually get to where you need to go but every once in awhile you can crash.

 

 

 

Edited by FrankTheTank

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18 minutes ago, FrankTheTank said:

Thanks Trusty.   Those pesky IV numbers.   If only we had a way to know for certain future IVs we would all be rich :)

 

I honestly think if we all pooled our money together and bought intraday data for the past 3 years on the top 50 or so stocks that we normally trade we could come up with some very nice looking IV and RV graphs that could give us a real edge when trading these earnings events.

 

VolHQ is great but only taking one snapshot a day at end of day is like driving a car and only looking at the road once every 3 minutes.   You can usually get to where you need to go but every once in awhile you can crash.

 

 

 

iVolatility.com is a great supplier of exactly this type of data and SO has a relationship with them. Maybe it's something worth looking into.

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On the subject of hedging, we have between us found several ways to hedge ratios. Each has advantages as well as downsides and to some extent you cannot always choose a solution because your position would not allow it. This is the case for example if you have a ratio that is rather OTM after which it can be difficult to find either just a short (shorter term) hedge or a ratio above it even further OTM that yields anything or where spreads still allow a sensible position to be opened. You are then by default choosing a put or put spread as a solution.

Based on some experience of late - don't ask just be happy I paid the learning fees for this - there are perhaps some further handholds we might outline beyond the above which is related to how your ratio is constituted. At some time, I will rewrite  the whole rational trader thread to incorporate all the fantastic wisdom that we deduced but as a place holder two remarks.

Hedging a ratio with a ratio works well but you must treat it as a hedge. That is when it yields money after the stock moving down, you must try and close it for ca. 50% of the cash value you got in credits. Preferably more of course, if you do not it will function as an additional ratio which can work out fine if the stock moves your way but not so much when the stock is lacklustre and RV decline is powerful. Then the OTM ratio will be disproportionally hit from the RV decline and you may find - as I did - that your hedge losses are crushing your main ratio wins. Where the RV decline is moderate or the stock movement very powerful - the hedging of a ratio with a ratio may make more sense than other strategies.

By contrast when RV decline is powerful and stock movement not that strong historically, a short hedge in a briefer term expiry is likely a safer route. This one must also not be misjudged, if the stock rips up gamma on the short hedge will crush the ratio winnings if it happens further away from expiry.

From the above it also follows we shouldnt be dogmatic about our hedges and change horses in the middle of the trade if required. This I have done successfully with a trade where I started with a hedging ratio, closed it for a profit that almost completely compensated the loss on the main ratio and subsequently opened a short hedge ratio. It did mean the position had to be exited at the Friday before the last week as hedging beyond was difficult.

Anyway just some musings which may help us make the right choice and possibly also to have handholds regarding timing as RV decline is rarely linear throughout the lifetime of a trade.

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On 2/9/2021 at 4:46 PM, FrankTheTank said:

Thanks Trusty.   Those pesky IV numbers.   If only we had a way to know for certain future IVs we would all be rich :)

 

I honestly think if we all pooled our money together and bought intraday data for the past 3 years on the top 50 or so stocks that we normally trade we could come up with some very nice looking IV and RV graphs that could give us a real edge when trading these earnings events.

 

VolHQ is great but only taking one snapshot a day at end of day is like driving a car and only looking at the road once every 3 minutes.   You can usually get to where you need to go but every once in awhile you can crash.

 

 

 

Just as an aside, the estimate of 45% IV on the Friday was rather accurate...

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50 minutes ago, TrustyJules said:

Just as an aside, the estimate of 45% IV on the Friday was rather accurate...

Good call. It looks like that long weekend really messed up the IV which was a lot lower than any other Wednesday earnings at T-2.  (chart below).   I am sending you a PM now about re-writing the Rational Trader post.

 

image.png

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On 2/9/2021 at 9:46 AM, FrankTheTank said:

I honestly think if we all pooled our money together and bought intraday data for the past 3 years on the top 50 or so stocks that we normally trade we could come up with some very nice looking IV and RV graphs that could give us a real edge when trading these earnings events

I would think a running chart of ATM straddle RV, intraday included, would be a great tool.  Possibly the IV too.  Then you just need to mark the earnings dates on the chart like on Thinkorswim.  I find the gf58ometer very helpful for entries and often extend the lookback a good way.

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