Note: The updated strategy is found here.
I am no longer testing this. It appears to be working at this time while the overall market is at such high volatility. I do not feel like adding any more entries into my database.
The year is 2020, the market has crashed, and volatility is high.
My goal is to collect earnings on some of this volatility using Short Strangles, Short Straddles, Selling Short Vertical Call Spreads, Iron Condors (in very liquid options), or Selling Credit Vertical Put Spreads. The first two plays are undefined risk and the last three are defined risk plays.
The idea of the earnings play is NOT to try to predict the price movement of the underlying stock after the earnings announcement but to sell into IV Expansion and collect the IV contraction after the earnings announcement.
I’ve noticed that on many active stocks that the Implied Volatility of options tends to rise into earnings thus raising the price of options contracts. This volatility appears to become erratic then tends to drop the morning after the earnings announcement. Of course, this is not 100% of the time on all stocks.
Some people relate this expansion and contraction of volatility to fear and greed. That may be the case with retail investors, but when I see 3000 option contracts trading on each tick, I realize that this is not retail investors trading. These trades must be institutions and their High-Frequency computers trading against each other as they move large sums of money based on their own algorithms. Of course, this is just my personal speculation and my goal is to ride that wave of expansion and contraction and take some profit from it.
Many traders ride the IV ramp into earnings, but I am curious if selling straddles and strangles the day before the earnings announcement and then selling immediately in the morning after the earnings announcement will work for a nice profit. This has been done by others and is nothing new. I just need to type this out and keep this here for my own reference to see if this test works. If it does then I am also curious if it will work consistently in this high volatility market we are currently in. The market which is run by computers.
Yes, these undefined risk trades can be dangerous. Yes, I can lose a large sum of money if a trade goes against me. Yes, the risk is unlimited if I am selling naked calls and puts.
This is a work in progress. It will be re-written as I test my trades and figure out what works and does not work. It may not work at all.
- The IV of the option(s) must be greater than 50 when opened.
- The options must be liquid. Ideally, 1k or more in open interest. This is so I can quickly get out of the trade if it moves against me.
- I look at the price range the stock has been trading for the past 52 weeks. This helps me decide to use a short strangle or a short straddle. For example, if the stock price is channeling in a narrow range then I typically set up a straddle because I will receive a larger credit and do not expect a large swing. If it is in an uptrend or a downtrend then I may set up Short Vertical plays. I will not collect as much credit, but I can skew the play from neutral to bullish or bearish if I am so inclined to.
- The earnings width of the underlying stock must be no greater than $10. I look at the day before and the day of earnings of the stock price (historically) to determine this. I usually just eyeball this on a chart for the past couple of years. Of course, this does not predict that the future price-earnings jump will be the same width. If the underlying stock price jumps pretty wide then I will usually set up a Strangle since I can adjust for the width I expect the underlying stock price to jump.
Articles of Interest:
Earnings Play Trades
Click on the Stock Symbol to take you to the individual trade.
|Symbol||Date & Time||Description||Net Value ($)||% Profit / Loss|
|AAL||04/23/2020 02:03:18 PM||Sell 1 May-15-20 @ 2.59|
|AAL||04/24/2020 09:40:06 AM||Sell 1 May-15-20 @ 2.52||.08||2.7|
|INTC||04/23/2020 12:53:06 PM||Sell 1 Apr-24-20 Strangle 1 @ 3.40|
|INTC||04/24/2020 09:31:49 AM||Buy 1 Apr-24-20 Strangle 1 @ 2.50||.90||26.47|
|NFLX||04/21/2020, 11:36:12 AM||Sell 2 May-15-20 375/370 Put Vertical @ 1.3 Limit|
|NFLX||04/22/2020, 9:54:24 AM||Buy 2 May-15-20 370/375 Put Vertical @ 1.1 Limit||.20||15.38|
|DAL||04/21/2020, 1:30:42 PM||Sell 1 Apr-24-20 23/23 Straddle @ 2.1 Limit|
|DAL||04/22/2020, 9:36:32 AM||Buy 1 Apr-24-20 23/23 Straddle @ 1.71 Limit||.40||18.96|
|SNAP||04/21/2020, 12:34:05 PM||Sell 1 Apr-24-20 13/13 Straddle @ 2.25 Limit|
|SNAP||04/22/2020, 9:34:02 AM||Buy 1 Apr-24-20 13/13 Straddle @ 2.5 Limit||-.25||-11.11|
|CMA||04/20/2020, 2:36:31 PM||Sell 1 May-15-20 25/35 Strangle @ 2 Limit|
|CMA||04/21/2020, 9:44:20 AM||Buy 1 May-15-20 25/35 Strangle @ 1.75 Limit||.35||17.5|
|IBM||04/20/2020, 12:54:10 PM||Sell 1 May-15-20 100/135 Strangle @ 2.4 Limit|
|IBM||04/21/2020, 9:37:50 AM||Buy 1 May-15-20 100/135 Strangle @ 2 Limit||.40||16.67|
|PM||04/20/2020, 3:04:57 PM||Sell 1 May-15-20 70/82.5 Strangle @ 2.85 Limit|
|PM||04/21/2020, 9:35:14 AM||Buy 1 May-15-20 70/82.5 Strangle @ 2.67 Limit||.18||6.32|
|HAL||04/17/2020, 3:21:29 PM||Sell 2 Apr-24-20 7.5/7.5 Straddle @ 1.03 Limit|
|HAL||04/20/2020, 9:45:41 AM||Buy 2 Apr-24-20 7.5/7.5 Straddle @ 0.91 Limit||.12||11.65|
|SLB||04/16/2020, 2:59:29 PM||Sell 1 Apr-17-20 14/14 Straddle @ 1.12 Limit|
|SLB||04/17/2020, 9:36:00 AM||Buy 1 Apr-17-20 14/14 Straddle @ 0.99 Limit||.13||11.61|
|PG||04/16/2020, 3:11:00 PM||Sell 1 Apr-17-20 116/125 Strangle @ 1.3 Limit|
|PG||04/17/2020, 9:30:48 AM||Buy 1 Apr-17-20 116/125 Strangle @ 0.7 Limit||.60||46.15|