It's Earnings Season, and we get the ball rolling tonight with a pretty high octane, high profile name in RIMM.
And pretty sizable options bidup to say the least.
What does the options board suggest as an over/under for the magnitude (not direction) of the move? Well, the first thing we have to do is guesstimate just where that option volatility might go tomorrow after the news is out. And this is a tricky one. Normally, historical volatility (the blue line) is something of a guide, but that is questionable in RIMM right now. The stock itself is pretty much stuck in this range ahead of the news, so this statistically calculated number is misleadingly low at about 37 volatility. Or is it? Other than the earnings-related blips over the course of the year, RIMM stock does actually trade at a mid 30's volatility clip.
And the options? Well, they tend to trade a bit higher than that in "dark" times. But not all that much higher. Volatility in the Oct trades for about 81 now, while November volatility changes hands at a mid 60's clip. And as per above, past history suggests volatility in both may dip to the low to mid 40's tomorrow.
So what kind of move does that imply tonight? Just heard $15 on TV. Sounds a smidge high to me, but really just a smidge. I come up with about a $13-$14 move using a 45 volatility. But remember these are all estimates, no one knows exactly where option volatility will go.
Why is this relevent, even if you have no RIMM position? A sudden burst/collapse in a stock of this psychic importance obviously has ripple effects across the Street. But if this magnitude move is already expected, something within these parameters is relatively insignificant to the bigger picture.
8 comments:
how are you coming by your estimates? i see what the strangle/straddle are worth but we still have two weeks to expiration. aren't these moves too high?
with vol at 45 in oct, the oct100 straddle still is worth $7-8, so the implied move just doesn't seem that high, or am i doing something wrong?
you have a couple issues with it. First off you have to use a few different strikes. Secondly, you have to then "move" the stock to different price points to see where those options will trade at the new price and new volatility.
Basically, what I do is create delta-neutral combos (delta neutral right now) like staddles/strangles and then see at what point those strangles break even. And I am using both Oct and Nov in this one, sometimes it's too close to the near expiration or too far from the 2nd one to make that possible.
Add it all in and yada yada yada, I was getting moves about $13-$14.
me again. i don't believe the board suggests an over/under for the move of $13/14, as you claim.
you mean 50% of the time this beast will move greater than $13?
then just buy the $13 straddle and even if it moves 'only' $10 you're still a winner with the resulting vol.
could i be confusing mean and median? i understand that the math implies that some of the moves over $13 will be, say $40, but do those outliers add up to a median expected move of $13? that seems to make the straddle way cheap to me.
my experience is that selling staddles/strangles in these bidups works more often than buying them. But you lose more on the losers, like you say here, RIMM going up or down 40. I would guess the expected gain over the course of time is probably close to zero, what tends to happen is if lets say RIMM is overpriced and doesn't move, and then a few more high profile names do the same thing, then the next batch anticipates shallower moves. A
well you have a bet with me using your methodology, (and the method of the talking head you quoted who was on CNBC).
if you want to take the one day close-to-open move based on "a few strikes and the second month" as a basis for the an over/under bet on an earnings move, you're on.
i may be wrong, but i'm willing to gamble. (i also plan on speaking to some option theory experts -- i only trade them for a living, which does not make me an expert on theory.) - bb
I didn't realize I was betting you. I was just guesstimating the expected range and giving my opinion on it.
sorry for being belligerent. i guess i'm looking for you to say that your methodology and thinking about this was all wrong -- or point out where i was wrong. this is in the spirit of getting to the truth and/or learning something.
one of us is all wrong about what the median expected earnings move was.
-bb
i'm not sure either of us is "wrong". There are different ways to look at it and play it.
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