Turning a Huge Misconception About Options Into a Big Opportunity

Most traders are confused about how to trade options around earnings, because they don't understand the massive increase in options implied volatility that takes place as a stock approaches its earnings release date. In this video we discuss a way to take advantage of this misconception and profit from trading options skillfully around earnings releases.
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[@sc0or]

Don't forget people, that IV is at the highest level just before earnings. Especially far out of price. IV of 50-80% is typical in this period. You will buy it, and pray that further movement after the earnings announcement will cover IV drop. Or, if you sell straddle, pray that dramatic movement won't happen. There is one conclusion from this. Late expiration series loose IV more active than close ones. So, if almost ALL stocks have high IV just before announcements, and it drops significantly after, and only few of them move significantly, just sell far expiration series IV, and protect against price movement with buying near expiration series. You'll put all this IV difference into your pocket with almost any stock you chose.

[@imnokasparov]

Good points. You can also make money if there is a big movement after earnings since both options will either be deep in the money or deep out of the money and thus have little to no extrinsic (time) value.

[@sethfreudberg4750]

@@imnokasparov that's true but you can still lose in that scenario if the drop in IV is blown away by the size of the price move.

[@imnokasparov]

@@sethfreudberg4750I think you are mistaking my comment to mean I am short volatility (like selling a straddle before earnings). I was referring to dshchurov's idea of doing a time spread before earnings. His belief is that when vol is high it should (but not always) be high in the back month options. His idea was to buy the near term options and sell the far term options. In that scenario, either a crush in vol or a big movement in the underlying or both will benefit the position.

[@sethfreudberg4750]

@@imnokasparov I see. I'll take a look at the reverse calendar around earnings.

[@1roxtube]

Maybe I missed it, but what expiration series do you use typically for this strategy?

[@Mechaneer]

If a stock is known to have this kind of options activity, why not also buy the long straddle two weeks before the earnings (before the options prices spike), and sell for an extra ~$1700 gain before initiating an iron butterfly?

[@michaelkofman3881]

Would it make sense to buy the straddle 2 weeks out, sell it within 3 hours for profit, then clamp on the iron butterfly?

[@75idm]

Thank you Seth, this is helpful.

[@edriley3240]

Thanks Seth great video

[@Dicofole]

Great Stuff ! Can you make a video on what is needed to be hired on SMB'S options desk ? and what to expect as a trader on your desk ?

[@SmithnWesson]

I think maybe the more interesting strategy is buying that earnings straddle two weeks or a month before, and then selling it the day before earnings.

[@louisvuittondonvg9040]

it doesn't work

[@markmcnair5864]

The farther out you go, the more expensive the contracts by design

[@sethfreudberg4750]

Some people trade that way also, Smithn. We have a guy on our trading desk who trades using that approach, actually.

[@acekumar6479]

There is options backtesting software (paid, not free) which allows you to test when to buy the calls/ puts / straddle, and when to exit (before earnings). It's still just a backtest and has no predictive ability. But still better than flying blind. How good is backtesting: Comparable to driving your car looking at the rear view mirror vs. driving your car blindfolded. Not perfect and will never be perfect, but somewhat helpful

[@emilydance5999]

There's a massive increase of IV as earnings day approaches? So the options two weeks prior to earnings are massively mis-priced by the market? Doesn't sound right.

[@zeugzeug9281]

It`s not the ones two weeks prior, but the ones expiring right after ER

[@sethfreudberg4750]

It is a pretty consistent phenomenon Emily, even though on the surface, the market should be more efficient.

[@joseph155]

Seth whats the best book or video to use to start learning about options. I really dont know anything about them

[@sethfreudberg4750]

Joseph, why don't you start by going to Optionsclass.com. We have a 2 hour webinar for no cost that will provide you with some ideas on that.

[@nestorflores2494]

awesome stuff

[@smbcapital]

Thanks Nestor!

[@sethfreudberg4750]

Nestor, let me know what else you might want us to discuss in these videos. This video was a result of a request from another commenter.

[@markmcnair5864]

What’s the return on capital for your buying power on this trade?

[@sethfreudberg4750]

That would have to be calculated after a very large study, as there are so many variables, Mark.

[@markmcnair5864]

@@sethfreudberg4750 Fair enough

[@bevanclark3828]

Great video Seth.

[@smbcapital]

thanks Bevan!

[@sethfreudberg4750]

Bevan let us know what else you'd like us to cover in future videos!

[@bevanclark3828]

@@sethfreudberg4750 Love to have a video on portfolio hedging strategies. eg VIX plays, ratio backspreads, OTM puts or other strategies that are effective against a tweet induced correction.

[@sethfreudberg4750]

@@bevanclark3828 Okay let's see what we can do in those areas Bevan. We do have a video on how to play $VIX spikes if you check our channel. That is on topic for you.

[@sethfreudberg4750]

@@bevanclark3828 here's the vix video: kzbin.info/www/bejne/mYW7aHWbqdl3p80

[@panamamike7095]

In your example, you bought the 170.00 options and then sold the 160 options, what's up with that?

[@sethfreudberg4750]

Michael I think you meant the 370 and 360. The 370 example was two weeks before expiration. The 360 was the case where the pumped up volatility created the loss when buying and the gain when selling.

[@toddmoody3559]

So why not buy it at 717 then just before earnings just sell it back and keep the difference. Not trying to hit home runs but singles. Roughly 2500 - 700= 1800. So no loss. Just ride the pumped up price and get out

[@acekumar6479]

Seth- I've watched quite a few videos from SMB and they have been helpful, even if they reiterate some of the stuff I already knew. Thanks for that! The "iron fly selling" idea used as an example for NFLX's April earnings worked great. A similar trade during NFLX's Jul earnings would have gone close to Max loss. What are the tools & techniques you use in your decision making process to decide when to play and when not to play?

[@Vacidity]

Lmao I literally tried a straddle on Netflix yesterday for earnings and lost like 50 percent overnight... Noooob.. could have saved myself 1500 if I watched this video

[@OptionsGeek]

Seth, I know that you know this but just want to make sure it's clear to your audience: The Top Hedge Fund Managers (ex-the few Volatility Funds like Citadel, DE Shaw, etc) in the world don't trade iron condors. This is a retail strategy drummed up by market makers who created some options education a few years back. As a former Whartonite, I'm sure you respect new thinking. I would be happy to show you in person what I've come up with. It's new. It's changing the game. And your traders will love it. [e-mail].