EARNINGS TRADES PART 2 20190819 RDO SFFxO Traders Meetup (Raleigh - - PowerPoint PPT Presentation

EARNINGS TRADES PART 2

2019‐08‐19

RDO SFFxO Traders Meetup (Raleigh Durham Open Stocks Futures FX O i T d ) Options Traders)

PRIOR TALK 2018‐05‐23

Dan Queen– Background Dan Queen Background

• Product Management for ITT, Alcatel‐Lucent, now Nokia

– (Electrical Engineer by training‐Marketing)

• Retired 2012, started trading full time, married, 3 kids, 2 Gd
• Tried various trading or studied methods

– IBD canslim, Dailygraphs, Vectorvest, Wisetrade, OptionMONSTER … – Opened Datek Margin Acct 2002=>TDA Sept 2002, OptionXpress p g p , p p =>Schawb, Fidelity IRA – Watched CNBC, Cramer’s books/TV, Barrons, AAII … – Investools couse 2011, Reading and Study Investools couse 2011, Reading and Study – 2012 TDA Trader TV clicked on Tastytrade and ShadowTrader …. – Today options trades are done on tos, tastyworks and none since last time on Fidelity which is a very limited platform since last time on Fidelity which is a very limited platform

2

Last talk 5‐23‐2018 d l Earnings Trade Presentation outline

• Market Maker Move (MMM)

Market Maker Move (MMM)

• Implied Volatilty (IV), IVRank, IVPercentile
• Probability of touch
• Probability of touch
• thinkorswim (tos) Platform use set‐ups

T d t

• Trade set‐up
• Chart examples
• Results YTD of earnings trades
• Q&A

3

Today’s d l Earnings Trade Presentation outline

• Review what an earnings trade is

Review what an earnings trade is

• How to find earnings trades using Excel.

– Download stocks with upcoming earning – Remove ones without options – Remove low priced stocks – Note stocks in certain sectors to avoid – Rank order by opportunity

• Defending trades gone wrong

– Rolling untested side to collect additional premium depending on DTE – Roll out in time and wait to be right – Close trade when loss is 2x credit collected

4

Thanks to Tom Sosnoff Thanks to Tom Sosnoff

h k ll l Thanks to Bill Gates Excel VisiCalc created by Dan Bricklin, Software , Arts withBob Frankston

5

Trading Style Trading Style

• Strategic

Strategic

• Seller of premium
• Options not stocks
• Options not stocks
• Contrary

T d ll

• Trade small
• Defend trades

– 2x or 3x the loss – Or …… Until the stock beats you.

6

Why I trade earnings Why I trade earnings

• 2014 When I started trading frequently it was

2014 When I started trading frequently it was the only time I could collect any premium

• See the results quickly late afternoon Mon
• See the results quickly, late afternoon Mon‐

Thur and close the next day or two. H di

• Have more trading occurrences

Need Batting Practice Watching; little

7

Need Batting Practice Learn by doing Watching; little improvement of decision ability

Experience =Number of occurances d d l Option Trading and some analogies

8

How How

• Trade from the short side. Sell Strangles or

Trade from the short side. Sell Strangles or Iron condors in the case of high priced stocks, ~Delta Neutral

• Place the trade close to day’s end for earnings

after the close and before next day’s market

• pen.
• Profit by the IV crush after earning

announcement is released. Buy back position at profit

9

SPY 2004‐20190812 Weekly Bars SPY 2004 20190812 Weekly Bars

2019 2004 2017 Flat for Year Avg IV ~17% since 2011 = = = = = 

10

https://www.macrotrends.net/2603/vix‐volatility‐index‐historical‐chart

Volatility Volatility

• Implied Volatility (IV) is determined by the

p y ( ) y current option contracts pricing on a particular stock or future. It is represented as a percentage that indicates the annualized expected one that indicates the annualized expected one standard deviation range for the stock based on the option prices. For example, an IV of 25% on a $200 t k ld t t d d $200 stock would represent a one standard deviation range of $50 over the next year.

• IV Rank
• IV Percentile

11

Difference between IV Rank IV Percentile Difference between IV Rank IV Percentile

https://www.tastytrade.com/tt/shows/options‐jive/episodes/difference‐between‐iv‐rank‐and‐iv‐percentile‐02‐19‐2016

12

IV Percentile IV Percentile

13

IV Collapse after earnings announcements IV Collapse after earnings announcements

14 OJ_GuideToTradingEarnings_170427.pdf

tos chart showing IV, IV Rank, IV Percentile earnings est‐act and time SEE thinkscript at end of presentation, show edit study

h b lb Telephone =Conf Call Lightbulb = Earnings Annoc IV IVP IVR IVP

15

IV

ATT IV Drop After Earnings Example

7/25/17 10/24/17 1/31/18 4/25/18

PRICE IV

16

The AAP trade 8/12‐8/13/2019 The AAP trade 8/12 8/13/2019

17

AAP Earnings 8/13 6:30am h screenshot ~8:30 am

IVR76 IVP83 IVR76 IVP83 IV43

18

AAP 8:05 AM 1‐min Bars AAP 8:05 AM 1 min Bars

IV43

19

IV43

AAP 10:48 1‐min Bars,

Short 125P/160C 20‐Sept Sold @ 3.35 Buy @ $1.60 10:43am 10% Return on BPR IV drop  10% Return on BPR

20

How to build a Earnings Calendar Spreadsheet How to build a Earnings Calendar Spreadsheet

• Go to tos calendar
• Select the days desired After Day and Before Day
• Export each csv file and merge them
• Add column formulas for MMM, strike points volume, price

Before After. 3 min effort so far

• Sort to remove stocks with no options low priced and volume
• Sort to remove stocks with no options, low priced and volume

stocks 2.5 min additional

• Copy into watchlist, then export to csv file Stk avg volume,

py , p g , correl volsizzle, HTB/ETB, Industry, Sub‐Ind,sector, div freq. 3 min additional O b fil O d h t 2 d t k

• Open above csv file. Open spreadsheet 2 and copy stocks,

then selected static values. Save both files with unique

• names. 2 min additional or 10‐12 min total.

21

Show live tos Calendar examples here

See attached Excel spreadsheet See attached Excel spreadsheet 2019‐08‐20‐21‐Calendar.xlsx

22

Tastyworks Earnings Watchlist ( k l f ) (Tastypicks news letter is free)

23

Building Custom element Building Custom element

After the market close = BarsTilEarnATM

CUSTOM4

input length=20; def xx = ‐getEventOffset(Events.EARNINGS); def yy = sum(HasEarnings(type = EarningTime.AFTER_MARKET),length)[‐length +1] > 0; plot x= xx+yy* 5; plot x= xx+yy*.5;

Before the Market Opens = BarsTilEarnANY

CUSTOM5

input length=20; def xx = ‐getEventOffset(Events.EARNINGS); def yy = sum(HasEarnings(type = EarningTime.Any),length)[‐length +1] > 0; plot x= xx+yy*.5;

24 barsb

What is Market Maker Move (MMM) What is Market Maker Move (MMM )

• MMM or Market Maker Move measures the

MMM, or Market Maker Move, measures the expected magnitude of price movement based

• n market volatility It measures the implied
• n market volatility. It measures the implied

move based on volatility differential between the front and back month The MMM helps to the front and back month. The MMM helps to identify the implied move due to an event between now and the front month expiration between now and the front month expiration (if an event exists).

• http://tlc.thinkorswim.com/center/faq/general.html#q_01111111111119

25

Market Maker Move (MMM) Market Maker Move (MMM )

• Expected move is the amount that a stock is predicted to increase or

decrease from its current price based on the current level of implied decrease from its current price, based on the current level of implied volatility for binary events. We use this calculation on the day before the binary event or very close to the expiration date. The expected move of an stock for a binary event can be found by calculating 85% of the value of the front month at the money (ATM) straddle Add the price of the front the front month at the money (ATM) straddle. Add the price of the front month ATM call and the price of the front month ATM put, then multiply this value by 85%. Another easy way to calculate the expected move for a binary event is to take the ATM straddle, plus the 1st OTM strangle and then divide the sum by 2 then divide the sum by 2. We only use this for a binary event because the accuracy of premium decay and all of the variables associated with implied volatility are too rich to accurately reflect expected move for a longer time period to accurately reflect expected move for a longer time period.

• https://www.tastytrade.com/tt/learn/expected‐move

20180502

26

Front‐Back Month IV Difference l MMM location

Frt mth less than back mth therefore no MMM shown (data 20180518) shown (data 20180518)

27

Probability of touch 2x Prob ITM or l d d Delta during trade

28

16_04_08_Probabilty_of_Touch‐_Realistic_Expectations_(MM)_rev.pdf

Probability of touch

(cont)

Probability of touch (cont)

29

Guide To Trading Earnings Guide To Trading Earnings

30

OJ_GuideToTradingEarnings_170427.pdf

Example: TWTR 4/24‐4/25/2018 Example: TWTR 4/24 4/25/2018

31

Example: TWTR IV DROP 3 MIN IN Example: TWTR IV DROP 3 MIN IN

9:33:42 am .7129 .5805

32

PLCE – TRADE NEAR MKT CLOSE PLCE TRADE NEAR MKT CLOSE

Trade time 14:28:37  A little early, note IV increase into close. Try 3:30 EST

33

The Plan The Plan

• Learn the strategy and build your own trades

Learn the strategy and build your own trades.

• Be able to explain the trade.

l d i f

• You control trade entry, see opportunity of

your advantage.

• Size the trade 1‐2% of portfolio
• Take profit at 50% for strangles and 25% for

p g straddles

• Control loss at 2 times the credit collected

Control loss at 2 times the credit collected

34

The Plan

(cont)

The Plan (cont)

• Avoid Biotechnology(BIO), Pharmaceuticals (PHAM)
• d
• tec
• ogy( O),

a aceut ca s ( ) Industries

• Avoid take over and merger stocks

g

• Understand the limitations IRA vs Margin accts
• Nobody knows anything

y y g

• I do not know anything, my opinion does not matter
• The math works! (with enough occurrences)

( g )

– Insurance co, Casinos, Banks loan money …

• Keep a Journal, record credit/debit for every position

p , y p

35

Market Awareness Market Awareness

• What is the level of VIX

What is the level of VIX

• Individual stocks follow

i i id ill lif ll b

• Rising tide will lift all boats
• Stock all time high, low, or mid range
• Center trade?
• Regular expirations more liquid than weeklies

Regular expirations more liquid than weeklies

36

Market awareness Market awareness

37

From tos chat room Shadow Trader select “Watch” Tab.

Trade set up and Results Trade set up and Results

• Earning trade the near close the day before earnings announcements

Ti ht t k bid k d th ti ht ti B/A t t ik

• Tight stock bid‐ask spreads, the tight option B/A on atm strikes.
• Highest IVR+IVP with the following IVR>50, IVP 75
• At least 15% difference between Front Mth and Back Mth IV
• 500K or more avg daily shares traded

g y

• Select short strangle strikes 1.5 the MMM, Check the open interest
• Most brokers (tos,TDA,Fidelity,Schawb…) require IRA accounts buying a further

OTM call strike to define risk. Tastyworks allows naked short calls in IRAs cash secured

• For high priced stocks, Iron Condors traded with same short strikes above and IRA

accounts

• Buy back “to close” the trade next am. Place GTC order at your target profit level
• Excel win loss

Excel win loss

– I am offering this as my experience and not a recommendation of any future trades.

38

Closed Trades Cumulative $ 20180105‐20190814

180 $180,000.00 120 140 160 $120 000 00 $140,000.00 $160,000.00 80 100 120 $80 000 00 $100,000.00 $120,000.00 Cuml $ 5‐ Roll 40 60 80 $40,000.00 $60,000.00 $80,000.00 VIX‐cls 20 $‐ $20,000.00

39

INVERSION ‐ a defense tactic INVERSION a defense tactic

Inversion refers to selling puts above calls or calls below puts when managing a Inversion refers to selling puts above calls, or calls below puts, when managing a short position. Inverted strategies are rare, avoid them unless they are absolutely necessary and increase our probability of success. Don’t look to open a position with an inverted setup, but there are times when inversion may result from adjustments made to current trades, especially after large outlier moves. When strangles are inverted, the stock price should remain inside of our short strikes to maximize profit/least loss. The difference here is at expiration, the short options to maximize profit/least loss. The difference here is at expiration, the short options will hold all of their intrinsic value since they would be ITM. For this reason, we would want to trade them instead of letting them expire to avoid exercise fees. (tastyworks is $0 to close, other brokers depend on commission and # contracts held) With this ill i h i i l ibl d hi i strategy we are still extracting as much extrinsic value as possible, and this strategy is usually used to reduce our initial loss on a position or potentially break even. Above taken from: https://www.tastytrade.com/tt/learn/inversion

40

p // y / / /

What is inversion What is inversion

41

Inverted ‐Strangles (incl +Garbage Wings) Inverted Strangles (incl +Garbage Wings)

• Dividend risk ITM calls

Dividend risk. ITM calls

• Exercise and assignment,

id k id li i

• Bid ask wider ITM, slipage is greater

https://www tastytrade com/tt/shows/market measures/episodes/inverted

42

https://www.tastytrade.com/tt/shows/market‐measures/episodes/inverted‐ strangles‐defensive‐and‐offensive‐09‐06‐2016

Review Summary Review Summary

• You know what the MMM is.

You know what the MMM is.

• You know what IV, IVRank, IVPercentile are.
• Probability of touch is and what to expect when you

Probability of touch is and what to expect when you place a trade

• thinkorswim (tos) Platform use set‐ups, build an

thinkorswim (tos) Platform use set ups, build an earnings calendar, sort it in excel.

• Trade set‐up how to pick a trade suitable to your

p p y level of acceptable risk, you control order entry.

43

Books that were helpful

44

QUESTIONS AND DISCUSSION QUESTIONS AND DISCUSSION

45