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Impliedvolatility

$NET Earnings Play + How to Trade Earnings In General(Note that I am writing this idea about an hour after market open when $NET is trading around $90) Thought I would publish a quick idea on how I like to select and play earnings on stocks. $NET looks like a decent candidate as an example and actual trade. Earnings reports represent an opportunity for a BIG move, but we just don't know WHICH direction. Many newer options traders like to buy single-legged options (calls or puts) at very near expirations to express a hunch or opinion on direction. The options appear cheap with HUGE payouts if you hit a home run. But those are overwhelmingly losing trades, even when you get the direction right. Why? Implied Volatility (IV) gets absolutely JUICED for earnings plays. For example, suppose I am bullish on $NET earnings and want to buy a call- Buying the ATM $90 Call for 2/12 expiration means $NET needs to move up to $95 just to breakeven, and about $100 to give you about a 1:1 reward to your risk ($520 profit to your $520 debit paid) Buying an OTM $100 Call for 2/12: breakeven is at $102, $104 is 1:1 R:R If you think going out to the next further expiration is better, it's not. The 2/19 expiry on those same strikes produces similar price points to breakeven and 1:1 profit ATM Call for next week's expiration OTM Call for next week's expiration To some that trade might not look that bad, but what is not shown on these charts (generated from theoretical calculators) is the impact of IV Crush . If we close today at $90, ER happens after today's close, and we open tomorrow around, say, $95, and close around $93, those calls are going to lose most of their value . The reason for this is people paid(really, over-paying) for a big move that did not seem to come. Most earnings have their biggest moves AT earnings, not a week after. The momentum is largely lost. Impact of Implied Volatility, IV Curve, Implied vs Actual moves for previous earnings Unless you have a crystal ball for direction, you generally want to buy or sell volatility based upon the expected magnitude of event What this means is if currently the IV is sky-high up front and absolutely plummets in the months afterwards, you look to see what previous moves did vs what their implied moves did. I look at MarketChameleon.com for this. If the actual move of the last 12 earnings as well as the average move is about equal to or less than the implied move was, generally people are over-estimating the magnitude of the move The IV Curve/term structure gives you an excellent opportunity to buy or sell volatility on one term relative to another. If IV has been climbing and looks like its cooling off, you sell it. If IV looks like its been calm and is starting to climb up, you buy it. This is explained best buy buying a straddle at one term and selling a straddle at another. More common term structure. Implied Volatility is relaxed but expected to rise -sometime- in the future. Term structure you get with most earnings events or when Reddit wallstreetbets gets obsessed with a stock. What are 'IV30', 'IV60', etc? Options are instruments of TIME Because they are instruments of time, we are always looking at the price of something relative to the future, and the future is generally different Options Expirations (OPEX) dates, usually the monthlies. For stocks they are very interested in OPEX dates occurring around special events like an earnings report, dividend, or some kind of conference, results of a trial, economic event, and etc. Generally options markets are looking ahead at intervals of about 30 days. You see this with CBOE's $VIX index, which tries its best to reflect the outlook 30 days from now (Per CBOE FAQ on VIX: "Only SPX options with more than 23 days and less than 37 days to the Friday SPX expiration are used to calculate the VIX Index. These SPX options are then weighted to yield a constant maturity 30-day measure of the expected volatility of the S&P 500 Index.") Here's how I am playing Cloudflare $NET earnings- Sell a straddle for next Friday (surprise surprise). Tomorrow's expiration is absolutely jacked on IV juice, but it is a little TOO near for my liking. What if NET moves up to close at $110 tomorrow, but if I had just one more week it could've settled closer to $100 and made me a profit? Tomorrow's expiration IV is 170, which is about 40% more than next Friday's 120, and will surely get crushed extremely hard if it doesn't produce a good move, but I get 30% more premium selling next week's expiration (2/19), and that one will also plunge if there's a non-move We buy a straddle at a further out expiration, one where the IV is far lower The idea here is that we are mostly playing Theta/time. The hope is that if the stock doesn't move much the value of the near-term straddle sold goes down significantly, while the far-term we bought goes down, but not as harshly. There's also potential for the IV curve to balance out so that the near-term lowers a bit while the far-term rises a bit, giving value to our long straddle while leeching the near-term straddle we sold Here are some guidelines playing with Double Diagonals/Calendars- Set a limit buy on the option you sold to buy it at $0.05, Good Till Closed. If you're short on an option and its basically lost all that value, take your risk off the board for a measly 20-something dollars. Who knows if you celebrate early and then a massive move happens, you could have just eliminated that risk potential (Remember to close your long one as well, or replace the short you closed with a new one) I like to close the spread before expiry and not allow an ITM option to be exercised. That adds another dimension of complications most are not ready to deal with Consider rollouts. If you sell the 2/12 or 2/19 and we get a nothingburger, most of the crush has probably happened by tomorrow's open. You buyback (Buy to Close) your $90 call and put and now sell (Sell to Open) a later expiration date, like the 2/26 or even the 3/19 (if you did a diagonal, this would make it an Iron Butterfly, if you did not you cannot sell the $90s since you are already long, you'll have to roll those out) In the rollout scenario, it is sometimes pretty ideal to have your long straddle be at a much further out date because you can rollout your short straddle several times I find that generally you are much more protected on big moves to the upside, less so to ones on the downside. This is related to a number of things like Implied Volatility, Skew, etc, but it's not a bad idea to place your straddle a bit lower rather than higher. Look at your Theoretical Options Calculator and see what is the most likely scenario Good luck and happy trading. Please let me know if you have any questions, comments, etc. I am always learning and am susceptible to writing something incorrectly or even having a misunderstanding of things :)
NYSE:NET
by chrism665
11
Disney - Straddles going into Earnings? Hey Traders! Disney is reporting earnings today after market close. There really isn't much technical analysis can do to determine what outcome the report will have on the stock price. But I will say this... Disney's stock showed decent price appreciation in the last two and a half weeks going from lows of $117.23 per share to highs of $147.68 per share. Although Disney is off it's highs, the current trading price of Disney's stock is $135, which is still above its 8 day exponential moving average. Whether Disney meets, beats, or misses analysts estimates for this quarter's EPS and Revenue, the option prices are a big move for Disney. A look at the "At The Money" straddles (at the 135 Strike, expiring tomorrow) show they are trading for nearly $600 . Which means Disney would need to move up or down by $6.00 per share just to break even. Right? But wait... Keep in mind that option prices are also made up of premium.. which consists of time value and implied volatility. Implied Volatility is considered a measurement of the perceived risk for an individual option contract. That risk is then priced into that option as a premium. Usually, implied volatility is at its highest before anticipated earnings reports or company news announcements. The day after the news is made public, implied volatility usually drops, which can drastically lower options prices. In reality, you would need more than a $6.00 per share move in Disney stock considering. I say this because there is nothing more frustrating than seeing you were right on the expected move, but lost money on the option because you forgot to consider the effects of implied volatility. Now, grab your favorite drink, sit back and watch Disney's stock after the bell as they are expected to report 5 minutes after market close. REMEMBER: Reference to specific securities should not be construed as a recommendation to buy, sell or hold that security. Specific securities are mentioned for educational and informational purposes only. YouCanTrade is an online media publication service which provides investment educational content, ideas and demonstrations, and does not provide investment or trading advice, research or recommendations.
NYSE:DIS
by UnknownUnicorn6775423
Implied volatility of optionsHello traders, Volatility is a measure of how quickly (the speed) the stock (but can be any security) moves up or down in price. Statistically, it is usually calculated as the standard deviation of stock prices over some time, usually annualized. This statistical measure is expressed as a percent. A stock that has a 90% volatility is more volatile than a stock with 20% volatility. Since implied volatility is a projection, it may deviate from actual future volatility. This is the only variable that is truly unknown (“implied”), it can be substantially out of line with what one might reasonably expect should happen, because of that, traders can use their analysis to exploit it to their advantage. If implied volatility is relatively high, options will be more “expensive”. On the other hand, if implied volatility is relatively low, options will be more “cheap”. The terms “expensive” and “cheap” are not correct, because it is a relative term and the price of today that looks “expensive” can tomorrow be more expensive. We can see this example on the chart. Two stocks that are relatively close in price. ZM implied volatility for the option presented is 77.4% NVDA implied volatility for the option presented is 51.2% ZM option price – $63.2 , NVDA option price - $43.4 Traders need to check the implied volatility of the stock to itself and other stocks, depending of course on the strategies they want to use. The vega Vega is the amount by which the option price changes when the volatility changes. Volatile stocks have more “expensive” options, meaning the price of the option will raise if the volatility will increase and will fall if the volatility will decrease. The vega is an attempt to quantify how much the option price will increase or decrease as the volatility moves, all other factors being equal. Vega is expressed as a positive number. (when buying options) For example, if the stock XYZ is at 100, and the 110 Call is selling for 12. The vega of the option could be 1.5, and the current volatility of XYZ is 60%. If the volatility increases by 1% to 61%, then the vega indicates that the option will increase in value by 1.5, to 13.5. If the volatility decreased by 1% to 59%, then the call would have decreased to 10.5. Vega is related to time. The more time the option has remains, the higher the vega is. Vega is greatest for At the money options and approaches zero as the option is deeply In the money. Since a deep In the money option will not be affected much by a change in volatility, it will be most affected by the stock price. Also, for at-the-money options, longer-term options have a higher vega than short-term options. Vega does not directly correlate with other “greeks” like delta or gamma. Chart explanation: Lines: Blue 3 points, light green 2 points, dark green 1 point, yellow break-even, red -0.95 points (95% loss). Strong colored lines – The option inputs at Friday close Weaker colored lines – Increasing only the implied volatility by 30% The meaning of this is to show what will happen if after we entered the trade the volatility will change. (Increase in this case) ZM – Option price -> 63.2 , stock price -> 511.52 , strike price -> 510 ,intrest -> 0 ,days to expiration -> 56 , implied volatility -> 77.4% ,23/10/2020 NVDA – Option price -> 43.4 , stock price -> 543.61 , strike price -> 540 ,intrest -> 0 ,days to expiration -> 56 , implied volatility -> 48.5% ,23/10/2020 I want to note, that the absolute increase is 30%, but the relative increase is different, meaning the 30% increase has more effect on NVDA, because it has a lower IV, 48.5% to 78.5% the increase here is 61%, ZM higher IV 77.4% to 107.7% the increase here is 38%. This means that you will profit much faster in NVDA if the IV will go up 30%. In the next educational post, I will write about option strategies, specifically about Strangle VS Iron Condor.
Editors' picks
NASDAQ:NVDAEducation
by ZoharCho
13
Fear or Greed? - Simple Volatility AnalysisToday, the S&P 500 was able to make strong gains again. However, in a still uncertain environment. The probability of short-term pull-backs is high. On the one hand, the VIX is still trending above the important 50-day line and, on the other hand, the Relative Strength Index was unable to breach the 48.5 thresholds. Thus, the upward trend that began in mid-August remains intact for the time being and should provide further volatile trading days in view of the upcoming election. However, since the successful breach of the 50-day line, the trend has faltered slightly. Since mid-September, the VIX has been trading in a range between 25 and 31 percentage points. The pressure on the stock markets, especially in the S&P 500, could increase considerably if the upper side of the trading range at 31 points can be sustainably overcome. This would confirm the trend continuation pattern and activate the price target at 38 points. On the bottom side, the lower side of the trading range and the 50-day line act as a support area. Only a breach of the area around 25 points could dampen the downward risk.
CBOE:VIXLong
by SalahBouhmidi
Implied Volatiliy a Risk Pre and Post Earnings AMZN AAPL GOOGLI want to point out two things in this post: 1. The elevated implied volatility before earnings on blue chips stocks is per se a risk factor due to high call open interest and the following reduction in implied volatility post earnings. 2. The SKEW index is signaling increasing tail risk. The first point: As I’ve pointed out in recent posts, high open interest has been a tailwind for stocks as market makers are short calls and forced to buy the underlying without any other purpose but to hedge. Before earnings, implied volatility (IV) on stocks rises significantly. For out-of-the-money options, the delta rises with higher IV (this makes intuitively sense because higher volatility means a higher probability for the option to get in-the-money). As IV rises before earnings, the sum of the delta dollars rises. This is forcing market makers to increase their notional hedges, i.e. they need to buy more of the underlying when their net short calls (status quo) in order to stay delta neutral. Post earnings IV falls . This is a risk when market makers are long the underlying stocks, and traders long the options. When IV falls (all else equal) the market makers may sell the underlying stock no matter how good the earnings reports are. The second point: The SKEW Index is derived from S&P500 options, and measures tail risk, which is the risk for outlier returns. When the SKEW is 100, the option market is discounting negligible tail risk. As the SKEW rises above 100, the tail risk is increasing. The SKEW is not a timing instrument, but worth watching as it reaches extreme levels (now >140). In summary: The large cap stocks have had an amazing outperformance as I’ve highlighted in recent posts. Even though they may beat earnings expectations, the structure of the options market may be a headwind post earnings. The SKEW is signaling higher tail risk.
Editors' picks
S
by eirikb007
1
VIX poised for a sharp breakout 1. As can be seen VIX has once again formed a bullish wedge which is ready to breakout in the very near future 2. Another way to look at this is by combining the 2 wedges which is forming a triangle ( see attached line chart). This is also showing signs of a breakout. 3. 50d SMA for the PUT/ CALL ratio is at EXTREME lows; last seen in 2009 ! This is reflecting extreme complacency and it can almost never end well; a sharp correction is a given (see chart below) 4. What would the catalyst be ? who knows... could be the FED meeting or something random that the market will conveniently choose to react to STRATEGY: bought sept contract bull call spread (25/35)
Editors' picks
TVC:VIXLong
by markethunter888
9
DIA - 22.6.2020- WHAT COULD WE EXPECT OF.. Hi, traders. My name is Lukas and I am a beginner in trading, respectively, I only trade 9 months. But that means I have to do the necessary analyzes without it I can't trade. I want to show you how I work on myself and document my beginnings. I use Vix and my strategy is built on to return to average. I highlight the important support levels and resistances that flow from the volume profile, all drawn on graph. These zones determine the ability to respond in some way to the market from 1 to 3, with 1 being the largest. Short description of analysis: We are getting out of the average local volume profile values, so be aware and expect input at $ 250. Of course, this must be confirmed by the volatility index. Keep in mind important fundamentals.Of course, my analysis does not serve like market forecasts and I am not responsible for your trades if you use my analysis for your own trades.
AMEX:DIA
by Lucas_Sochulak
$SMH Iron Butterfly Opportunity$SMH is currently short-term overbought as the ETF has risen from about 98 to above 116 before shedding gains. Because of it's short-term overbought status, it might look like a good short opportunity. However, I think it $SMH might lurk between 110 and 116 as the overall market digests Trade War news and the now questionable expected rate-CUT from the Fed in July. Since implied volatility is low, an Iron Butterfly typically will perform better than an Iron condor, or naked equivalents.
S
by BpowersCLT
MGM - Bullish-neutral Iron CondorStock has sold off since Jan, and held the downtrend throughout 2018. Bearish momentum is slowing down, as if recovery is in the works (compare LVS idea); betting this bad boy experiences a slowdown, with price staying in the range or having a quick reversal of the downtrend. 21/22/33/34 FEB19 IRON CONDOR @ 0.25 CREDIT General plan: Roll if necessary & if possible mainly to reduce risk. Target maximum profit, unless significant profit appears early. Comment or direct message for discussion, or on other interesting ideas! Follow for updates.
NYSE:MGMLong
by themdtrader
The GBPUSD playbook – how Brexit could play into price movesIf you like volatility GBP is the place to look, and we can see one-month GBPUSD implied volatility (vol) at 14.0%, relative to say AUDUSD and EURUSD vol at 9.34% and 7.57% respectively. To put this into perspective, the implied move in GBPUSD over the coming month sits at 413-points from spot, and this expiry encompasses the expected Commons vote on 10 December. As we can see on the daily chart, a 413-point move takes us into the top of the multi-month range, as well as the 38.2% Fibo of the April to August sell-off. How price reacts around here would be very interesting. Volatility is naturally directionally agnostic, so a 413-point move could easily take us through the lower esculents of the range at 1.2600 and potentially into 1.2200. The interesting part is that that we have seen encouraging signs of cooperation between Theresa May and the EU, involving a Free Trade area with a customs arrangement. This comes at a time where various factions of the Tory party have failed to garner the needed 48 letters to prompt a confidence vote. So, the prospect of May being removed from power has diminished for now, and that has supported GBP. Once this weekend’s EU Summit is out of the way, the real attention turns to whether the draft Withdrawal Agreement passes through the Commons and at this point that seems low. Therefore, it seems logical that GBP could be sold into the vote, although, we can already see from the weekly CoT report and GBPUSD risk reversals that traders are already heavily short the GBP and have paid up for GBP put vol. The downside in cable is therefore cushioned to an extent, but should the MPs in the Commons vote down the deal we will likely see another sharp move lower. Vols imply a move into 1.2400, so a move into say 1.2200 and I would be a willing buyer of GBP, as my base-case is that May will head to Brussels to re-work the deal, and on the second attempt in the Commons and it may pass, causing a decent rally as bearish positioning is unwound. As you can see, the Brexit playbook is diverse, but vols tell us a decent move could be on the cards and this has huge implications for stop placement and position sizing. Disclaimer. Trading leveraged products carries a high level of risk and may result in you losing substantially more than your initial investment. Pepperstone Group Limited is licensed and regulated by the Australian Securities and Investments Commission (AFSL 414530). Pepperstone Limited is authorised and regulated by the United Kingdom Financial Conduct Authority (FRN 684312). This information not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation
by Pepperstone
LONG USDJPY - FED & BOJ MONPOL, RISK SENTIMENT & ELECTIONLONG USDJPY: 1. Slightly late posting this position but we got long at 104.5 earlier today. The rationale behind owning USD VS JPY is as follows. USD risks are bid 1) in the run up to the 2015 dec hike USD traded extremely bid with DXY breaking through 100, based on the last 2wks i expect USD to mirror 2015 and continue the bid tone we have seen both in 2015 and now. That said in the past few wks usdjpy has traded relatively mutely compared to the market thus imo has more alpha than other crosses and as another few 100pips before we can consider usdjpy stretched. 2) the usdjpy has a Dec hike to look forward to. Whilst i expect USDJPY to be faded as we saw following the last hike, i think these next 2 months we will trade to 109/11 as rate hike hopes push the pair into firmer resistance. 3) USD election risk is likely going to fade with the neutral choice of Hilary winning. Thus any Trump uncertainty weighing on the USD will be washed out which could be worth 50pips at least. JPY risks are to the soft side 1) BOJ monpol risks remain skewed somewhat to the dovish side since whilst inflation continues to trade firmly and consistently below 0 the BOJ are DEFINITELY unable to raise rates and are unlikely to consider tapering (the ECB has firm 0.4% inflation and even they may not consider a taper). Thus the risks are certainly to adding to easing, with the most hawkish outcome being neutrality. 2) JPY like the rest of the safe havens remain bid up some 20% in 2016 alone thus a correction lower some 5% isnt extreme and infact is fairly justified (thus a 111 target is arguably on the cards). This is especially true assuming the next big risk event (election) passes with the most neutral and odds on favourite candidate winning (hilary). Thus any risk premium priced into yen for this purpose will be faded and encourage the 5% correction i mention above. 3. JPY volatility remains at the lows of the yearly range thus a topside correction encouraged into election and FOMC events will possibly see yen trade with a softer bias. Risks to the view: 1. If Trump pulls off the tail end probability then USDJPY long imo will be invalid given i expect the USD to trade softer and yen to rally. I would expect USDJPY to trade to 100 in the event of Trump winning.
Long
by QuantumLogicTrading
1