jfouche

I don't think you can get 60-40 tax treatment on 1256 gains after electing section 475. Once you have done that, I believe all trading goes to form 4797 and flows into 1040.

The purpose of the other areas of the form is to stop you from creating virtual losses and offsetting them against real gains. It used to be a trick that market makers did - buy a delta hedged position on a super volatile stock, so in a short time you have a big loss on one leg. Then roll the losing leg to another expiration and you have loss for tax purposes. It shouldn't happen in SO trades as we don't play games like that. For more see section 1092 of the tax code.

To my limited knowledge, the whole spread reaches the market makers, and they would go short the fly/condor until they can hedge through whatever other combination of calls/puts/stock they need. I imagine spreads also could match to customers too, like if some customer was happening to short the exact fly/condor you want.

Well, here's an answer based on the Black-Scholes solution for call prices. http://quant.stackexchange.com/questions/4612/why-do-atm-call-options-have-a-delta-of-slightly-bigger-than-0-5-and-not-0-5-exa?rq=1 So, the 0.5 thing is not exactly true except when you're close to expiration.

Yeah, the 0.5 thing relies on some approximations that aren't working when the remaining time and IV are very high. Look at the LEAPS on TSLA, the 50% delta is the 215 strike! I suspect this is for the reasons Marco points out -- the future is not symmetric in those cases.

Well, the option is concerned with the value of the underlying at expiration, which depends on dividend yield and cost of borrowing funds. For a stock with a decent yield, the price to take delivery of the stock in 1-2 years will be significantly lower than today's price, so the apparently ATM call is actually an OTM call. I'd be curious where you saw the ATM call having >50 delta... possibly in an unusual situation.

If we play a random calendar on a stock with no event, we will profit from time decay like TOS expects on a day with the underlying unchanged. This is different.. Here, the model thinks several days of intense moves are expected in July, but really it is only one big jump. So TOS thinks the July options should rapidly decay each day, but it really happens all at once after we react to the news. It may help to think about what would happen if the report was postponed to after July expiration. The July options would be worth very little and the calendar would be a huge win. And if it was put off to September you would be nearly wiped out on the straddle, with the calendar maybe a small win at best.

The theta will not actually help here because almost all the premium is tied to earnings, and TOS doesnt know this. The two positions both play IV. Look at past calendars on SO where the stock sometimes went nowhere, but IV had to rise before we could exit. If you move to strangle instead of straddle you end up with a kind of double diagonal, which has its own special properties.. It would profit on a massive move and maybe zero move, but lose $ on medium size moves between the strangle strikes.

This seems like a spot to just add some puts to the trade and go for the 400/450 strangle. If we never get our spike it seems set up for a RIC held through earnings, but this is for the aggressive player only.

I'm a little tired of AAPL, but this looks like a big buying opportunity for the volatility.

Well, GLD has gapped up strongly almost every day since the bottom, so my IC is around a 10% loser. Still, it took a huge move to make that happen. An alternate that would have done better is the May 125/135/145 butterfly. This went from $3 to about $4.20 in just the first few days after the post. It's still profitable even with today's move.

It is definitely an aggressive trade. I wouldn't do it for 10% allocations like most of the plays discussed here. But GVZ at 18-month high gives it a pretty large profit zone.

I actually did a May 125/128/137/140 on GLD yesterday. So far it has worked out OK, 12% gain, but I didn't get the big implied vol. drop I hoped for yet. It would be up 50% with GVZ under 25. SLV IC would have trouble making money after commissions. To collect $1k in gross premium you might need 20 spreads, 80 contracts. For the very brave, it would have been a pretty good naked straddle / put sale. If it goes back into crash mode that would be the play. Either way it's tough to enter the winged positions when the optimal wing / strike choice is changing every 5 seconds.

Ouch. What was the other time?

The weird thing is that there is no negative carry in the VXX option market -- synthetic prices in future months are pretty close to the current price. [For example, Sep 18 call - Sep18 put is $0.7 with the stock at $18.79]. So, someow it is easy to short VXX -- perhaps there are so many long holders that it never reaches hard-to-borrow status. Although the puts work, if you are following premium-heavy strategies like SO, you can just short VXX and hold on as long as you feel like it. Periods like 4/2010 and 8/2011 would hurt, but you'd make it up from long gamma positions and a lot more.

I watched GILD closely. This one had a few days of vol spike with no stock movement, then had some unrelated announcements push it to almost $50. Definitely would have been a profitable straddle, though the strangle above is not hugely profitable.

Other examples: UTHR -- Again, ATM straddle at $60 was not profitable -- it stayed around $7 despite some volatile stock action. FDA announced rejection on 3/25, earlier than expected, at which point it collapsed under $3. JNJ -- Straddle at $80 was profitable if you got in between 3/20 and 3/25 and sold 3/29, possibly as much as 50% [$1.8 to $2.4]. This one is probably gamma related. JNJ has lower IV than almost any other stock, so a $1 anticipatory move is wild action. GILD -- This one is scheduled to get HIV drug news around 4/15. Currently the Apr 47.5/49 strangle trades $1.50. Stock has been very strong lately.

The announcement came on 3/27 after hours, but this strangle traded down to $5.50 or so in the days before the news. Post-announcement, the stock made a solid move, but there was no profit before the announcement unless you made an entry about 10 days later than my post [3/24 or 3/25]. If you entered then, you might have gotten $5.50 and been out at $6.30 to $6.60. [Obviously the stock ramped post-news and the straddle is now $14, but that is a different story].

The official schedule is https://www.spdrs.com/library-content/public/SPDR%20ETF%202013%20Distribution%20Schedule.pdf [Quarterly schedule] It's generally the 3rd Friday of the last month of the quarter, so it always goes along with a monthly options expiration.

As a live test, the BIIB Apr 165/185 strangle is trading around $7 with BIIB at $175 and their MS drug's approval expected no later than 3/28. Let's see if it can gain value from this point.

It looks like it will be on 3/15, which means you should avoid assignable positions after Thursday close...

Great comments. From browsing TOS it does appear that the entry time would have to be significantly earlier. This may also be less of a risk because sometimes results come out early, and ideally you would be out of the straddle at that time. Writing the pre-event options would mean you are selling protection against an early outcome/setback, and also taking the negative gamma of anticipated run-up before the news. I like that too.

Here are a few lists of dates to start. I checked some of the trades briefly with TOS, and it can work, although probably only half the companies have a viable options market with liquidity. Here are a couple of scenarios: Stock is in the $3-$10 range, and the drug event is essentially the entire future of the company. In this case I doubt there is a viable straddle which can overcome transaction costs consistently, though IV does do huge moves. Basically the stock itself is a call option on a miracle drug. A more mature company, usually at higher stock price, has one of many drugs come up for review. Here it might be able to work. A mega-biotech or huge pharma with many products has an event. I saw no reaction in IV for those. http://www.thestreet.com/story/11635300/1/27-drugs-facing-fda-approval-in-2012-2013.html http://www.thestreet.com/story/11516792/1/26-drugs-facing-fda-approval-in-2012.html

In theory, scheduled events for biotechs such as an FDA approval panel ruling would seem to fit the same basic mold as the earnings strategy. It probably requires a little more risk-taking, but some of the spikes in IV can be pretty breathtaking. Has anyone tried to play in this area?

It's hard to work with the underlying unless you qualify for portfolio margining. Otherwise the extra capital can dilute returns quite a bit. I've seen DITM calls/puts suggested as a replacement but I haven't tried it.