AMAT - Straddle Case Study

[InvestTrader 38]

AMAT has the ER scheduled to May/16 AMC. Today (May/14) is T-2

As an exercise I looked at it as a potential candidate to two day straddle.

I present bellow what I could understand from VolatilityHQ data.

Would you please comment on my interpretation and conclusion?

Please keep in mind that I am in the learning process on interpreting these charts.

Thanks in Advance.

 

RV falls in 6 of the 8n cycles. On average falls 9%

 

The stock doesn't seem to move much (exception for two of the cycles)

 

Straddle IV more than doubles 

 

AMAT returns on average 15.42% on this trade. Five of eight cycles return positive. Biggest loss is near 13%

My conclusion:

The fact that RV usually goes down and the stock doesn't move much makes this stock a bad candidate to a T-2 straddle.

However the big jump in IV and the fact that the result is historically positive makes me think that it could be a good candidate.

Given these data I would enter the trade.

 

 

 

 

 

 

[TrustyJules 3,212]

The analysis is not bad HOWEVER:

 

1) Note that RV encompasses both IV and theta changes as well as market movement - the rise in IV is therefore included in it and you cannot count it as a separate point in favour;

2) Current RV is above average which combined with the strong decline in RV means that there is a lot to make up

[InvestTrader 38]

39 minutes ago, TrustyJules said:

The analysis is not bad HOWEVER:

 

1) Note that RV encompasses both IV and theta changes as well as market movement - the rise in IV is therefore included in it and you cannot count it as a separate point in favour;

2) Current RV is above average which combined with the strong decline in RV means that there is a lot to make up

@TrustyJules, Thank you.

So, if I understand correctly this IV indicator doesn't have any value in this analysis.
Given this and the fact that you pointed that RV is currently above average, we don't have a case for make a AMAT straddle. Correct?

Also looking at the historical results, I noticed an outsized value of 75%. Without this value the average would be much lower (around 7%). This is also a negative point. Do you agree?

[TrustyJules 3,212]

4 minutes ago, InvestTrader said:

@TrustyJules, Thank you.

So, if I understand correctly this IV indicator doesn't have any value in this analysis.
Given this and the fact that you pointed that RV is currently above average, we don't have a case for make a AMAT straddle. Correct?

Also looking at the historical results, I noticed an outsized value of 75%. Without this value the average would be much lower (around 7%). This is also a negative point. Do you agree?

IV  has value but RV encompasses both and so is often more useful - nevertheless you cant completely ignore it because if its low (historically) and some event might make it move you could get more oomph out of your IV than otherwise. People vary in the importance they attach to it - I find it still relevant but check RV to mitigate being too optimistic. The stratospheric rise of IV before earnings is after all partially an outcome of the fact that IV is a basket to catch what the mathematical models cannot (earnings). @Christof+ always points this out and he is right.

With RV over average and decline strong I find it less compelling - the second point about the outsized return however doesnt concern me so much. Its more important to see how many losers there are and how big they were. If they are low and we could be in line for a 75% one every 10 times we do this then it could be well worth it.

[InvestTrader 38]

Thank you for the help and the explanations., @TrustyJules

Much appreciated  

[Yowster 9,180]

My thoughts on AMAT straddle:

• Regarding the IV, of course it will have a large spike because earnings day is only one day from expiration.  But because RV decreases a majority of cycles, the IV increase doesn't fully compensate for the negative theta in those cycles.
• Looking back over the last 3 years, RV drops 3 out of every 4 cycles.   The rising cycles tend to be larger spikes, so if you are in a straddle on those cycles you'll see a nice gain.
• There are also a few cycles where the stock price had a larger move over the last 2 days and these were nice winners.

In summary, an AMAT strangle has more downside risk than those we typically use because losses of over 10% happen more often when RV drops and stock price doesn't move.  But, when RV rises it tends to be a larger rise and stock price had some decent stock price moves so if you hit a cycle like that you can see a nice sized gain.

[InvestTrader 38]

Thank for the insights  @Yowster
It's not a typical SO trade. t's more like a lotto, given the contradictory  signs.