You can place a straddle or strangle. Strangle will be a cheaper but in this case I decided to enter the trade as straddle as it saves all the guessing on where the stock will be heading. I find that 9 out 10 trades can make >15% over a period of 6-8 weeks.
The criterions for the trade are:
- It must react to earnings – before and after
- IV must be low.
- Bollinger Band should be constricting
- ATR must be low
Let the trade run for at least 8-10 weeks. Place the trade 2 weeks before earnings. Basically, the most important that affects the price will be the volatility change. Note that implied volatility collapses after earnings but you can still make money from realized volatility on the few days after the earnings release.
It is noticed that the price of the options will fluctuate wildly as we move into earning seasons. I set an order to close the trade GTC at ROI of 20%. Anytime, it hits 20%, I am out. I may adjust my exits if the market shows some clear direction and go for a higher or lower ROI.
Below are 3 trades which I placed today
ATVI
BTO Jan 12.5 Call for 0.80
BTO Jan 12.5 Put for 1.15
Total Risk 1.95
Reward: unlimited but target 20% ROI
PE : Exit 3-5 days after earnings at 20-30% loss
A GTC order of 2.35 is placed for a target ROI of around 20%.
SE: Close the trade 3-5 days after earnings if it does not hit the target ROI
AIG
I expect the earnings of AIG to be very critical this quarter. It will determine whether the company will survive. Thus price is expected to gap up or down. I expect a gap down but who knows. The market can give you all kind of surprises especially with AIG!
BTO Nov 45 Call at 6.55
BOT Nov 45 Put at 7.6
Total Risk: 14.1
Target : ROI 30% ( it is more volatile and I expect a higher ROI ).
SE: Get out 3-5 days after earnings announcement.
NVDA
BTO Dec 14 put for 1.2
BTO Dec 14 call for 1.2
Total Risk : 2.4
Reward: unlimited but target
PE: 20% ROI
SE : Exit 3-5 days after earnings at 20-30 % loss
A GTC order of 2.9 is placed for a target ROI of around 20%.
Posts
Hi,
ReplyDeleteLet me give some updates on the above trades.
1. ATVI trade is slightly positive but not hitting ROI yet. Stock has moved upwards. Will inform when I close the trade
2. AIG is slightly negative because it has not moved for the last one week. But I believe AIG will move. This is a paper trade for me. Especially for AIG, I expect volatility spike as it gets closer to earnings. Probability of winning is still very high.
This earning period is very significant for AIG. It will tell the market whether it can repay its debt to the government. The market should reacts substantially to the results.
3. NVDA - slightly negative as it has not moved for the last one week. Will have to wait for stock to react to volatility as it moves closer to earnings.
I placed another 3 paper trades today to test out straddle. By the end of this exercise by next month, I have 6 straddle and strangle live trades to support my hypothesis on how to win on this kind of trades. The trades I put in are:
1.SHLD
As explained in the blog, I think this is a very good trade. I have enough straddles on my portfolio, so I place this trade on paper only. If the stock does not move over the next few days, I may decide to put in a real trade on my portfolio.
BTO Nov 70 call for 3.35
BTO Nov 70 put for 4.9
Total Risk or debit : 8.15
Reward: unlimited
PE: 20% ROI - a GTC STC order is place for 9.78
SC: Take a loss of 20-30% if the market goes against you.
May adjust to ratio spreads or calendar if market direction is clear.
2. GS
As proposed by Joseph, I am testing some trades on paper. His proposal looks interesting. I am trying out 1 bullish strangle and 1 straddle:
i BTO Oct 190 Put = 4.325
BTO Oct 190 Call = 4.575
Total debit = 8.9 (Risk )
Reward: unlimited
PE: 20% ROI
SE: PE: 20% ROI - a GTC STC order is place for 10.68
SC: Take a loss of 20-30% if the market goes against you.
May adjust to ratio spreads or calendar if market direction is clear.
ii. Bullish diagonal strangle
- BTO Oct Call 185 = 7.225
- BTO April 10 put 190 = 4.55
Total Risk or debit = 11.775
Reward: unlimited
PE: ROI 20%
SE : close after earnings for a slight profit or loss of 20-30%
Just a correction.
ReplyDeleteBullish diagonal strangle should be "bullish calendar strangle"
I close the GS straddle today after earnings.
ReplyDelete- STC Oct 190 Put for 2.72
-STC Oct 190 Call for 1.05
Total credit = 3.77
Since the trade is around 190 - it did not move! So I settle for a loss of
( 11.775 -3.77 ) = 8 x100 = $800.
Fortunately, this was a paper trade. I am trying to see how straddle reacts to earnings for GS.
The stock went up before earnings and fall back to pre earnings level causing the stock to stay at the same price. I lose mainly on time decay
Just to update I close my ATVI straddle today at 2.4 for a profit of 23%.
ReplyDeleteMost of my straddle trades are doing fine. It takes patience. Volatility is the key to making money for straddle.
I will give more thoughts on a separate posting on some new findings on trading straddle.