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Here's an idea. There is an instrument called a "straddle option" that is essentially a bet on volatility. I think it'd be interesting to try to formulate a s

Here's an idea. There is an instrument called a "straddle option" that is essentially a bet on volatility. I think it'd be interesting to try to formulate a strategy that made aggressive purchases of these around various product announcements. edit: Perhaps this wasn't the wisest comment ever, but not sure why it was modded down.

wagerlabs 16y ago
I tried buying strangles and stradles a few times, up to a few small bets ($40-50) at a time. There's a substantial difference on whether the earnings announcements are after hours in the evening or in the morning, for example. I think I would have made money with a trailing stop but Thinkorswim did not have trailing stops at the time. The problem, of course, is the volatility drop-off right after earnings announcements. You also need to evaluate what the company is doing and see if there's a good chance the stock will move. I found http://www.theflyonthewall.com http://www.theflyonthewall.com to be excellent for research. The volatility drop-offs doesn't happen right away after the earnings announcements, at least that's what I noticed. There's still a bit of time (minutes?) where traders are slugging it out. It's virtually impossible to monitor several positions for volatility drop-offs on Thinkorswim, though. ZenFire is available on the Mac but ZenFire equities and options are only available through a couple of brokerages where a large account is required. Contrast with futures (and options on futures) that I can get over ZenFire through my Mirus/Dorman account for a $500 deposit.
arthurdent 16y ago
Its a fairly well documented phenomenon that option volatility increases going into earnings then immediately deflates after the fact. An at the money "straddle option" is essentially purely a volatility play, but the problem is that once the stock moves, the "straddle option" accumulates various other risk factors that are harder to manage. This is also why you can't just sell the position knowing that the volatility will go down after earnings, because the change in the risk characteristics other than volatility may be sufficiently costly so as to offset the gains from the decrease in volatility with a short straddle position. This particular play is fairly common though and many option traders who feel they have insight into the magnitude of the future move relative to its pre-earnings pricing will make plays on it (largely based on historical evidence or earnings predictions).

wagerlabs 16y ago

I tried buying strangles and stradles a few times, up to a few small bets ($40-50) at a time. There's a substantial difference on whether the earnings announcements are after hours in the evening or in the morning, for example. I think I would have made money with a trailing stop but Thinkorswim did not have trailing stops at the time. The problem, of course, is the volatility drop-off right after earnings announcements. You also need to evaluate what the company is doing and see if there's a good chance the stock will move. I found http://www.theflyonthewall.com http://www.theflyonthewall.com to be excellent for research. The volatility drop-offs doesn't happen right away after the earnings announcements, at least that's what I noticed. There's still a bit of time (minutes?) where traders are slugging it out. It's virtually impossible to monitor several positions for volatility drop-offs on Thinkorswim, though. ZenFire is available on the Mac but ZenFire equities and options are only available through a couple of brokerages where a large account is required. Contrast with futures (and options on futures) that I can get over ZenFire through my Mirus/Dorman account for a $500 deposit.

arthurdent 16y ago

Its a fairly well documented phenomenon that option volatility increases going into earnings then immediately deflates after the fact. An at the money "straddle option" is essentially purely a volatility play, but the problem is that once the stock moves, the "straddle option" accumulates various other risk factors that are harder to manage. This is also why you can't just sell the position knowing that the volatility will go down after earnings, because the change in the risk characteristics other than volatility may be sufficiently costly so as to offset the gains from the decrease in volatility with a short straddle position. This particular play is fairly common though and many option traders who feel they have insight into the magnitude of the future move relative to its pre-earnings pricing will make plays on it (largely based on historical evidence or earnings predictions).