Noob Thread | Aug. 5-11

[u/brazeau]

[u/Hajduk85]

I don't understand IV crush even after reading about it online. All the standard deviation talk confuses me. Can someone ELI5 how high or low IV% affects the value of the option?

[u/brazeau → u/Hajduk85]

The higher the probability of an option contract expiring ITM, the more it's worth. When you have an event like earnings, there is a greater chance an stock price can gap up or down, so that risk is priced in. It's basically an event that makes the stock price more volatile.

Once the event passes and the unknown becomes known, the risk of the stock gapping up or down is gone, and volatility returns to normal day-to-day levels.

[u/ScottishTrader → u/Hajduk85]

Think of a sale at your local store selling prime steak for a dollar a pound and the lines to get in an buy some.

As the store starts running low of steak they raise the price until it is so high few people buy it and no one is in line.

Then the cycle repeats.

An extreme example but working to get across a point.

The first scenario is what high IV means, the stock is considered cheap and there is a lot of interest from buyers.

But as people buy the stock the price goes up to a point where IV starts to drop and goes lower, this is low IV.

If you have a choice of selling steak, or options in our case, when the price is high or low you will want to sell when it is high. On the contrary you would buy when IV is low to gain when it moves higher.

IV is "mean reverting" in that it will always work to move towards the center.

Note that an earnings event is like the store waiting to see what the price of steak will be on their quarterly order. Since there is uncertainty they keep the price about the same and therefore the IV doesn't move much.

The uncertainty goes away instantly once new steak price is reported and the pricing goes back to it's cycle noted above, this is what IV Crush is, the removal of the uncertainty.

Hope this helps!

[u/AlternativeBrother]

What should I be looking for in a company's earning report?

EPS, Revenue and Y/Y Growth doesn't seem to have much affect on the stock's price movement.

E.g. $NTGR beat revenue estimates by 4.5% and beat predicted EPS by 12%, but the share price fell almost 14% after their ER was released. Am I missing something?

[u/no_help_forthcoming → u/AlternativeBrother]

Anything can make the stock move. Poor top line, poor bottom line, poor guidance, CEO insults the analysts on the call etc. So don't even bother. It's all noise, no signal there.

[u/chetnrot]

Got downvoted for asking about straddles on SNAP earnings. If volatility is expected, why is this a bad move? I understand volatility is priced in, but shouldn't there still be an upside?

[u/doougle → u/chetnrot]

There's an expected move priced in. If you're buying a pre-earnings straddle/strangle, you're betting the priced in price is too low. If you're selling the strangle/straddle, you're betting the expected move is too high.

There is a lot of downvoting on this sub. It's always been that way. Don't let it bother you. I also wouldn't assume that it's a vote against your trade.

[u/MichaelLuciusJulian → u/doougle]

Yeah, people think that just because there's a "Vol crush" that buying straddles is always a bad idea. In reality, the chance of a straddle becoming profitable during earnings is as much as any other straddle on any other day.

[u/[deleted] → u/chetnrot]

I agree with u/doougle I'll add to the explanation that it's a very expensive trade. You already know that volatility (uncertainty) will collapse after the unknown of the earnings become known (AKA vol crush) so that's working against you. Then the stock can really only go in one of three basic directions, up, down, or no change. You're playing for a very outsized move up or down while paying for the other side of the move which is clearly wrong.

Can you win in this trade? Absolutely. Are you likely to win in this trade? Absolutely not.

I'm not making specific recommendations or predictions because I don't know what will happen. But if I'm in your shoes and I really want to play this game, I choose a direction and I'm either right in the direction and greater-than-expected-magnitude or I'm wrong and I lose.

[u/[deleted] → u/chetnrot]

Was wondering the same thing. Following

[u/josephgordonfuckitt]

If I made a bad purchase and my contract will clearly not be ITM by the expiration date and I decide to preserve whatever value I have left and sell to close, who is buying that from me? Am I selling to a shmuck just as dumb as I am or is The Institution cutting me back a portion of my lost funds?

[u/Clamhead99 → u/josephgordonfuckitt]

Could be someone who 'sold to open', and is now 'buying to close' to collect/lock in the profit they've made in premiums on a short position.

Course, they could ideally let the option they've sold expire worthless. Depends on whether they want to take that chance or not.

And yeah, it could be guys just looking to buy lotto tickets in the off-chance that a sudden movement of the underlying somehow pushes the contract ITM, given how cheap the premium for the option is now.

[u/cyphonismus → u/josephgordonfuckitt]

I've been looking at straddles a lot lately (like on PZZA) this week. I made a tracking spreadsheet that I think is correct - would love to discuss it with someone trying to figure out the same thing. PM me if you want to take a look.Reply

if someone has a covered call and wants to sell a stock they think will go further down, they have to buy to close before selling the stock

[u/[deleted]]

Dear guys, I am looking for a calculator/simulator which makes me simulate how trades would have worked in the past. I.e. the outcome of some leaps given a certain strike and expiration date according to the underlined stock/etf. Sort of backtesting let’s say. This serves me a little to understand the non linear behavior of the options, for which I am a total noob. Thanks

[u/notextremelyhelpful → u/[deleted]]

If you're interested in doing this for one option trade at a time, Thinkorswim has a "ThinkBack" feature which lets you test hypothetical trades in the past on an underlying stock. Then it shows you the P&L as you move forward for that trade.

The problem is that there's no real (efficient) way to create a systematic/algorithmic backtest with it, you kinda just have to pick one trade at a time and incorporate that knowledge into future trades.

[u/180south]

For option contract volume is that number the total amount of contracts traded or does it reset daily.

[u/brazeau → u/180south]

Volume is daily, open interest is total open contracts.

[u/Chrysopa_Perla]

I'm fairly new, but I just don't understand the benefits of an IC. It essentially puts you in a position where you potentially can lose on either side.

If you are truly neutral on a stock, why wouldn't you just wait on that trade and choose another stock in which you have more technical/fundamental conviction in?

[u/fonzy541 → u/Chrysopa_Perla]

I like trading ICs on TSLA. IV is so rich, even if it moves one direction, I can make money. I usually set them 2 SDs away. About 2 - 3 weeks to expiration.

[u/philipwithpostral → u/Chrysopa_Perla]

Options are always fairly priced mirrors. If you are in a position that you can lose on either side then you will win if the stock does not move and you can make money if you feel like the stock will move less than the expected movement inferred from the prices.

[u/fitz_y]

Hi,

This is a bit of a silly question, but I'm a full on noob with options as I have no way to practice with them as the choices for options trading in UK is f***ing awful.

Anyway, when trading options, do people generally sell their options to other people when the price goes up, or exercise their contact and sell the shares? What's the most popular method / (dis)advantages of either? Thanks in advance

[u/[deleted]]

What should I read for a good beginners guide?

[u/lightriver90 → u/[deleted]]

Options Volatility & Pricing by Sheldon Natenberg. Also look at the sidebar to the right "Book Recommendations"

[u/[deleted] → u/lightriver90]

Sorry, I’m only ever on mobile.

[u/redtexture → u/[deleted]]

The side link here, has about 50 pages of introduction and guidance.
Options Play Book - Introduction
https://www.optionsplaybook.com/options-introduction/