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Mastering the Markets
Trading Earnings
1
DISCLAIMER
Neither MasterMind Traders or any of its personnel are registered broker-dealers or
investment advisors. We may mention that we consider certain securities or positions to
be good candidates for the types of strategies we are discussing or illustrating. Because
we consider the securities or positions appropriate to the discussion or for illustration
purposes does not mean that we are telling you to trade these exact strategies or
securities. Keep in mind that we are not providing you with any specific recommendations
or personalized advice about your own trading activities. The information we are providing
is not tailored to any particular individual. Any mention of a particular security is not a
recommendation to buy, sell, or hold that or any other security, or a suggestion that it is
suitable for any specific person. Keep in mind that all trading ALWAYS involves a risk
of loss, even if we are discussing strategies that are intended to limit risk.
Also MasterMind Traders’ personnel are not subject to trading restrictions. Myself and
any others at MasterMind Traders could have a position in a security or initiate a position
in a security at any time.
Practice First
There is risk involved in any form of trading!
Max risk is realized if the Stock price stays between the two Option
Strike prices.
Basic Strangle
Stock $102.00
Changes in Time
Changes in Volatility
The easy way to see this is: If the Stock moves $1, the Option price
will move by the DELTA.
Gamma
DELTA is not constant, it will move if the underlying Stock price moves.
If the Stock price moves up, the DELTA on the Call Options tend to also
move up, while the Put Option DELTA moves down.
If the Stock price moves down, the DELTA on the Put Options move up
and the Call Option DELTA moves down.
The rate of change of the DELTA is called the GAMMA.
ATM has the highest GAMMA.
EX: Option has a VEGA of .15 and the Implied Volatility increases
by 1%, the Option will increase in value by $.15.
Gamma Strangle
• The Gamma Strangle is an Option strategy that is direction neutral
at the onset of the trade.
• It is typically done when the trader expects a large move, but does
not have a bias on the direction.
• The strategy allows the traders to capture large moves and trends.
Considerations
• The Option selection typically has a high Gamma (rate of change of
the Delta).
• High Gamma will change the Delta of the winning leg up and the
losing leg Delta will move down.
• Max risk is realized if the Stock price stays between the two Option
Strike prices for the duration of the Option cycle.
Trade Entry
• The Stock should be a volatile Stock, ATR 22 should be above $5.
• One Strike OTM Call and one Strike OTM Put are selected with at
least one full month of time before expiration.
Gamma Strangle Entry
• The time frame for the move is one to three days with a possible
limit of five days.
Stock $302.50
• It is typically done when the trader expects a large move, does not
have a bias on the direction but wishes to offset losses on the
losing leg of the trade.
• The time frame for the move is one day to several weeks.
• The strategy allows the traders to capture large moves and trends
while minimizing losses on one leg of the trade.
Considerations
• The Option selection typically has a high Gamma (rate of change of
the Delta).
• High Gamma will change the Delta of the winning leg up and the
losing leg Delta will move down.
• While high Implied Volatility can adversely affect the outcome, this
is minimized by the selling of premium against the losing leg.
• Max risk is realized if the Stock price stays between the two Option
Strike prices for the duration of the Option cycle.
Trade Entry
• The Stock should be a volatile Stock, ATR 22 should be above $5.
• One Strike OTM Call and one Strike OTM Put are selected with at
least one full month of time before expiration.
Strangle Spread Entry
• As the Stock moves through the next Strike price, consider selling
the Option at that Strike for the front week series against the losing
side.
STO Weekly 100 Put for $1.80 Mar 100 Put now at $5
$2 Loss on Mar 100 Put and a Gain of $1.80 on selling the Weekly 100
Put to create a Horizontal Calendar Spread.
Strangle Spread Combo Management
Stock 106
Mar 105 Call now at $10
#1 #2 EARNINGS #3
(1 – 4 weeks before Earnings)
1.) LONG VEGA STRANGLE
(1 – 4 weeks prior to Earnings Announcement)
Long Vega Strangle
• The Long Vega Strangle is an Option Strategy that is direction
neutral throughout the trade.
• It is typically done when Implied Volatility is low and the trader
expects a large move up in Implied Volatility.
• A significant move in Stock price could cause this strategy to act like a
Gamma Strangle and should be handled as such if the Stock price moves
beyond one of the Strike prices.
Trade Entry
• The Stock should be a volatile Stock, ATR 22 should be above $5.
• The Stock must have an Impending Earnings Announcement in the
next 3-4 weeks.
• Implied Volatility should be historically low, less than 20 is ideal but
Implied Volatility less than 30 can still be successful.
• Delta should be in the single digits to low teens.
DELTA breaking point: 6, 8, 14. Take the 8.
• This will mean several Strikes OTM for Call and Put.
• Typically these Options will be inexpensive.
Long Vega Strangle Entry
BTO 430 Call for $2.10
Delta .18, Gamma .055, Vega .33, Imp. Vol. 28
Stock $385
Three weeks before
Earnings
BTO 330 Put for $3.10
Delta .11, Gamma .034, Vega .23, Imp. Vol. 31
Trade Management
• Can exit anytime profit is realized. In most cases the trade should
not be managed until just before Earnings unless one Strike goes ITM.
Set alerts before ITM. The day before Earnings is the day you’re likely to
see the highest I.V. therefore best to exit just before Earnings.
• If one side goes ITM, exit that side and reposition that side if not
both sides. Follow same guidelines for repositioning.
• If the Stock moves enough to take one Strike price ITM, manage the
trade like a Long Gamma Strangle or a Strangle/Spread Combo.
Long Vega Strangle Exit
STC 430 Call for $4.80 Paid $2.10
Delta .30, Gamma .07, Vega .63, Imp. Vol. 100
Add the $13 to the Short Call and subtract from the Short Put.
The closer the Stock trades near the Short legs, the more profitable
we are.
IRON DRAGONFLY
The $14 premium received is not what the Market Maker priced in for his own
protection. Rather, it is the sum of the Asking prices that he built in from having
to make a payment. The high prices ATM (increased Implied Volatility) is to
protect the Market Maker from making a pay out so if you want to buy, you buy
high.
The sum of the Asking prices equals $15. This $15 is how far the Market Maker
is expecting the price to move upon Earnings Announcement. The $15 is not
predictive, it’s not telling us how much the Stock will move, it just shows how
much the Market Maker is protecting himself. If the Stock moves anything less
than the $15 he won’t have to pay out anything because he’s pumped in $15 of
protection for himself.
IRON DRAGONFLY
BTO 165 Call @ $.50
Breakeven Point $158
This strategy will take advantage of this severely reduced Implied Volatility collapse after an
Earnings Announcement.
Strategy will be a Long Strangle. Choose first Strike OTM Options with
highest Gamma. High Gamma must change Delta of winning leg up and
the losing leg Delta must move down for the trade to be successful.
- OR -
We Sell an Iron Condor using the same pricing advantage as used in
the Iron Dragonfly if the Implied Volatility remains greater than 60.
Perhaps even sell another Iron Dragonfly. The higher the Implied
Volatility, lean towards the Iron Dragonfly (example: IV is 72%).
We look at the ATM Options and add the Put & Call premiums (Asking
price) together and sell that Strike distance for the Iron Condor.
Stock gaps down to $147.50 with Implied Volatility at 42% after dropping from 167%.
Implied Volatility did not collapse. Can sell a Credit Spread in reverse direction of gap.
The strategy can be placed based upon the combined sum of the $147.50 ATM
Options. Best done if only one or two days until expiration.
Even if Stock moves towards the Short leg the Implied Volatility can drop to it’s norm
and prices may decrease if having to BTC the Short leg.
$162.00
Gapped down Post
Earnings
147.50 Call 3.20 x 3.50 $7.00
$147.50 147.50 Put 3.20 x 3.50
$141.50 BEP
Implied Volatility can collapse into the BTO 137.50 Put $.20
very day this trade is placed. Exit Short
Options when they collapse. Watch the
pricing and perhaps Implied Volatility. Total prem. of $7.80 - $.40 Long legs = $7.40 credit
DISCLAIMER
Neither MasterMind Traders or any of its personnel are registered broker-dealers or
investment advisors. We may mention that we consider certain securities or positions to
be good candidates for the types of strategies we are discussing or illustrating. Because
we consider the securities or positions appropriate to the discussion or for illustration
purposes does not mean that we are telling you to trade these exact strategies or
securities. Keep in mind that we are not providing you with any specific recommendations
or personalized advice about your own trading activities. The information we are providing
is not tailored to any particular individual. Any mention of a particular security is not a
recommendation to buy, sell, or hold that or any other security, or a suggestion that it is
suitable for any specific person. Keep in mind that all trading ALWAYS involves a risk
of loss, even if we are discussing strategies that are intended to limit risk.
Also MasterMind Traders’ personnel are not subject to trading restrictions. Myself and
any others at MasterMind Traders could have a position in a security or initiate a position
in a security at any time.
www.MasterMindTraders.com
Presents
60