This segment examines if a trader selects trades with a minimum volatility differential between the nearby expiration and the next month if this improves trading results. This is of special interest around earnings season.
There are excellent opportunities to sell premium on a short term basis during earnings season. That’s because there is a clear pattern of volatility increasing into an earnings announcement and quickly declining afterwards. A chart of Twitter’s IV over the last year demonstrates that pattern.
The tastylive research team first looked at the four most recent earnings cycles from 27 popular stocks and calculated the percent change in IV after earnings. The changes in IV varied from stock to stock. A table showed the implied volatility contraction. As earnings approach we tend to see a difference in implied volatility between the front cycle and the next monthly cycle. Monthly IV differential = (Front IV - Back IV) / Front IV. An example of this calculation using NFLX is shown on a slide.
Is there a differential threshold that makes earnings plays more advantageous given that the IV tends to overstate the actual volatility? This is what tastylive’s research team sought to determine.
The study was conducted using AAPL, FSLR, GS, LNKD and SBUX. The study combined 60 earnings cycles (12 quarterly cycles for 5 stocks). Strangles were sold with the width of the strikes equal to the expected move. A table showed the results of the number of profitable trades, percentage of profitable trades and total P/L. The results were shown for all trades and for those with a minimum monthly IV differential of 45% (the average difference from the 27 stocks mentioned above). The results were impressive.
Watch this segment of "Options Jive" with Tom Sosnoff and Tony Battista to see the results of the study and how this may improve your trading around earnings season.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.
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