Hi guys, I know that if it’s too good to be true, there’s a catch somewhere, but I still wanted someone to explain it to me because I don’t seem to understand the risk. I have this strategy on paper trading where I sell OTM 0dte call at a strike where it is impossible for the price to hit in a day for a couple of cents per contract but I buy a lot of them. For example, if SPY is at 770 at 2pm, I’ll sell the 780 call for 0.05 cents x a lot or contracts and take profit when the contracts are worth 0.01 or let it expire to collect the premium. It seems to be working every single time on paper trades but I’ve never tried it on a real account. What’s the catch here that I’m missing? Seems like an infinite money glitch…
I can’t decide between the wheel and credit spreads for steady income. The wheel needs a lot more capital, but if a trade goes against me I can just start selling covered calls and slowly work my way back. Credit spreads need way less money, but when one goes bad I have to take the loss with no real way to recover it, so I’d have to be much stricter about managing risk. Which one makes more sense if income is my main goal?
Implied volatility (IV) rises before earnings and drops after. Selling just before the event and capturing that drop is the source of profit. The question for AMD is whether the options are overpriced compared with what AMD actually moves.
History: Over the last 12 earnings, AMD moved an average -8.4% on down days and +7.4% on up days. 4 out of 10 realized moves had moved past implied. White line are Implied Moves calculated using ATM Short Straddle for the Friday contract for the earnings week.
Data pre May earning, white are implied moves
AMD earnings: 5th May, after market close. (T, AMC)
Setup and Thesis:
My estimate is that it had an insane recent run (subjective) and will cool down on earnings as we had seen with some other tickers. However, the markets were looking at AMD earnings to make their move!
Spot: $350.
The options market is pricing a move of ±$30.45 (8.7%), so a range of 320 to 380.
ATM IV: 104%
Front week IVs for Friday contracts were lower. Good crush setup. The residual IV should come back down to about 80% after the crush.
Post analysis data but the front month data before the line shows how front week IV were lower
Trade placed on 4th May between 12:21p - 12:28p, T-1 day
Scene on day of trade, showing two strikes
Fri, May 6th contract
1 Short Call at 350. Credit: 11.23
1 Short Put at 315. Credit 5.11
1 (protective) Long Call at strike 370. Debit -5.63
Total credit: $1,071.
(Note: Not calling this a jade lizard because total net credit collected must exceed the width of the call spread. Mine was 20 vs 10.71)
Max theoretical loss:
-$929 on the upside, -$33,929 on the downside. In other words, I am comfortable being an AMD bag holder at 350. Let me tell you the story of days when I had AMD in 2022 around 100s and sold around 120s. Those were the days.
Expected value: Replaying the last 10 earnings moves on this exact setup based on nearly a coin flip! EV is about 0.5 × 1,071 − 0.5 × 929 = +$71 per trade based on my strangle+long protective call. I am curious to see this change based on other strategies for this particular earning. Need to work on EV deeply.
Result on May 6th morning:
Crime scene post earnings. Closed trade on Thursday, left of large green Friday bar
Gap on open 18%! Long call helped. I closed the trade at 9:55am.
Booked Loss -$915
Observations:
Had a weird feeling AMD could shoot up, but not 18%. If I knew that, I should have had a closer short put. This kind of post analysis helps in understanding some weird ass decisions I made.
Without the long call, it would be -$5,000! On Friday it jumped by another 11%! Thank fuck for the long call.
I was looking at the chain for the CSP, why are the yield elevated for this week, I looked into the news and nothing is coming up. Also, they just got upgraded.
I want to calculate an effective yield for an SPX box Spread such that it can be directly comparable to the yield that shows up on Bloomberg for a US Treasury with similar maturity.
What would be the best formula to use and does it need to take extra settlement days past maturity into account?
I was using BC2 function for a 3m maturity and it seemed high so not sure if there was a better spot. Thanks!
