1. Try clicking on the name of the most recent article in the column on the right. This will remove the "Archives" list.
2. Try right click on the chart itself and open it on a separate window.
I am sorry that I cannot always make the chart small enough to fit neatly on the left column. I want you to be able to see the details I want to point out.
I Hope this helps,
Juan
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As I explained in my previous video clip, there is something that can be done in advance of the earnings report, which usually results in increased volatility, only to drop significantly thereafter.
Of course, you can simply get out of the position and be happy with whatever profits you've got. Occasionally, however, you have the feeling that the stock may rally with earnings. A compromise involves rolling over the longs to a higher strike price.
In the case of IDCC, which has given me good profits, I have the impression that the stock is going to rally, but looking at the charts, a case could be made that the stock is overbought and due for a correction. Here is what I did this morning:
The rollover to a higher strike price results in a credit of 2.25. Note that I also cancel the contingency order. Since the resulting trade is almost Delta neutral, a strong decline in the stock after earnings won't hurt me, so there is no need in keeping the contingency order. If the stock drops to 25 or below after earnings, I would most likely close the position a day or two later.
The stock price is at the top of the Bollinger band, and the oscillator is in the overbought area. So it should not come as a surprise if the stock goes down after earnings. A continued rally is also possible, and I would not like to risk my profits so far.
The resulting trade is almost delta neutral, but a Strong move up or down will give me additional profits. Note also that the volatility is high. IV for the shorts is 60%, that is very likely to fall after earnings. This may decrease the value of the short more strongly than the longs. It will be very interesting to see what happens with the volatility, which is clearly skewed right now. In my experience, by the second day after earnings, the volatility of the front month falls harder than the back months. We will see.
This transformation is not cheap or free. We took a credit for the June 25 calls, but the difference in strike price between short and longs carry a cash requirement. This is because you have now a diagonal trade.
I will keep you posted on my actions.
UPDATE
After earnings, the stock did fall, but the stock seem to be bouncing back. The volatility is still falling, both in front and back month. Here is the resulting trade.
Note the declining volatility in both front and back month. In a week or so, one would expect the erosion of the March calls.
17 comments:
Juan,
Out of interest, what is the cash requirement for this trade?
RE: "The stock price is at the top of the Bollinger band, and the oscillator is in the overbought area. So it should not come as a surprise if the stock goes down after earnings."
Why not change it to a PCCRC?
The volatility is high. My move is designed to:
1. Take profits, should the stock decline at first.
2. Take advantage of the decline in volatility in the front month calls.
Going into a PCCRC would be counterproductive because the volatility on IDCC is currently high and it is likely to drop after earnings.
Juan,
I was trading NVDA based on your PCCRC system. I did put real money in the trade.
Trade: 3/7 Mar/June 47.5 Calls
3/7 Mar/June 47.5 Puts
I got in the trade for a debit of $4,660 (excluding commission). Probably exit before earnings which is coming on the second week of May.
I will send you the S&P 500 I have via e-mail. Remember I have biased it with my opinion on being an impulse move.
:)
If anyone else wants the counts let me know. I will e-mail. Don't want to spam everyone.
Fortitude,
Thanks for the IB stuff you posted earlier.
Juan,
Based the greeks data for Mar 6, the total vega of the 6 long legs is 32.4, and that of the 3 short legs is -4.3.
If IV drops 5% for the long legs and drops 25% for the short legs, the resulting loss would be (5x 32.4) - (25x4.3) = $55.
If the long legs IV drops 10%, the loss would be $217.
HK,
RE: "Based the greeks data for Mar 6, the total vega of the 6 long legs is 32.4, and that of the 3 short legs is -4.3.
If IV drops 5% for the long legs and drops 25% for the short legs, the resulting loss would be (5x 32.4) - (25x4.3) = $55.
If the long legs IV drops 10%, the loss would be $217."
HK could you send Juan some snapshots for Juan to add to the Blog. It would be interesting to see this, as it adds to the discussion.
Juan,
I take your point about what you have said;
"The volatility is high. My move is designed to:
1. Take profits, should the stock decline at first.
2. Take advantage of the decline in volatility in the front month calls."
Varun, Glad you enjoyed the free video, I certainly found it informative.
In addition, IB have some interesting Webinars you can watch via this link. There is a lot to learn. **Smiles**
http://www.interactivebrokers.com/en/general/education/priorWebinars.php?ib_entity=llc
A few other interesting links;
http://en.wikipedia.org/wiki/Volatility_arbitrage
http://www.blonnet.com/iw/2002/09/08/stories/2002090801081200.htm
http://www.arbitrage-trading.com/trader's_guide_to_options1.htm
Hi, you have a nice blog. I will keep reading...Please take time to visit my
blogs about Stock Trading,
Option Trading and
Online Stock Trading.
VARUM said:
Varum: I was trading NVDA based on your PCCRC system. I did put real money in the trade. Trade: 3/7 Mar/June 47.5 Calls. 3/7 Mar/June 47.5 Puts. I got in the trade for a debit of $4,660 (excluding commission). Probably exit before earnings which is coming on the second week of May.
Juan: Excelent trade. You met my conditions: 1. High flier. 2. IV below 40%, 3. Volatility now on the rise, 4. Longs to expire after earnings.
If earnings is After May expiration, you could rollover from Mar to April and from April to May. if earnings report is before May expirations, the May options may rise in volatility in the proximity of earnings, then fall in volatility, with the longs, after the earnigns. Think about this carefully, as you decide to roll from April to May shorts.
Varum:I will send you the S&P 500 I have via e-mail. Remember I have biased it with my opinion on being an impulse move.
Juan: I can't agree with your counts because you are impulse biased, I am not. But it is healthy that we disagree, so everyone can see the alternative counts. I will post your charts for comparison, shortly.
HK said: Based the greeks data for Mar 6, the total vega of the 6 long legs is 32.4, and that of the 3 short legs is -4.3. If IV drops 5% for the long legs and drops 25% for the short legs, the resulting loss would be (5x 32.4) - (25x4.3) = $55. If the long legs IV drops 10%, the loss would be $217.
Juan: If you are correct, then my risk to stay in the trade, based on volatility is $162. I believe I have locked in my Delta gains, and Theta should be a strong force for the shorts, but not for the longs. If th stock jumps afer earnings, I still make additional money. All in all, I believe it is the right move. We will see....
Thanks for your insightful comments.
Currently, IV for the shorts is 60.7% and the longs 49.1%. I would expect that by the second day after earnings, volatility will decrease in both, but more in the shorts than in the longs. Let's say that the short IV would hit 40% and the longs decline too, to 45%. ¿What would be your calculation then?
Varun,
RE: "If anyone else wants the counts let me know. I will e-mail. Don't want to spam everyone."
Please could you send me a copy. Thank you.
Fortitude: HK could you send Juan some snapshots for Juan to add to the Blog. It would be interesting to see this, as it adds to the discussion
HK: There is no risk graph. Just pure calculations based on vega.
Juan Sarmiento said...
Currently, IV for the shorts is 60.7% and the longs 49.1%. I would expect that by the second day after earnings, volatility will decrease in both, but more in the shorts than in the longs. Let's say that the short IV would hit 40% and the longs decline too, to 45%. ¿What would be your calculation then?
HK: The vega for 6x Jun 30C is 33, and that for 3xMar 25C is 4. Assuming no change in the price of the stock. A decline of short IV from 60.7 to 40, would result in a gain of 20.7 x 4 = 83. A decline of the long IV from 49.1 to 45 would result in a loss of 4.1 x 33 = 135. Therefore, the net IV risk in this case is 135-83 = $52
It should be noted that a further drop in the long IV of say 2% would increase the risk to $118.
HK,
Thanks for the update.
Juan,
SBUX is looking good, but LRCX to me looks as if an exit from the trade is 'on the the cards', rather than a rollover...
***"Ignoring all other parameters, such as delta, vega, theta and gamma, including IV skews etc..."***
What is the 'ideal' number of weeks or days should be left in time value, in the front month options, when you sell them in a Calendar Spread?
Obviously it makes sense that selling the front month options with one day to go, does not give the ideal time value left to reap the time decay. That is an extreme example. Neither would it be ‘ideal’ to sell the front month options with one week to go.
The rollover is the ideal time when you are already in the trade (generally 4 weeks), but what would be the ideal time if you were entering a trade. Three weeks? Four weeks? Five weeks? Or perhaps another time value?
Juan,
SBUX looking good.
LRCX not looking so good at the moment. Strictly speaking we should perhaps exit and let go...
Or is there a plan B? **Smiles**
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