Defined Risk Options Strategies Around Earnings

to find risk and earnings okay so we decided to make a we decided to look for a broad overview here we said you know what let's go back in time and let's check it out and make sure hey we've talked a lot about strangles we've talked a lot about naked positions and a bunch of people email I mean they said hey you know what I understand but I don't want talk about naked positions right now let's talk about positions that are defined risk because I can't do naked positions and let's see if everything you're talking about holds true are the same the numbers work is the same thing so the binary nature but earnings announcement allows us to sell high implied volatility in anticipation of a ball crush yesterday like for example I used undefined risk but sometimes I will use to find risk you know it just depends it's kind of a whim thing yep the trade strategies we implement look to capture this crush and can be defined or undefined risk can be used as defined risk or undefined risk it's just it's a preference thing it really depends on how much capital you have and what kind of size everything like that but it's it it generally speaking it's six of one half dozen another you want to find risk use except less profit potential you want undefined risk you take you know you have more risk and and more potential losses and obviously a higher profit potential the binary nature of an earnings announcement allows us to sell high implied valen our does next one please so in previous studies we've observed that the expected volatility around binary events will be overstated when compared to actual volatility with this being with this being a driving market characteristic we will look at interesting underlyings to place earning trades on as in addition as an addition to our portfolio so all we're saying here is hey you know what we understand how overstated volatility works we also understand how it works with respect implied volatility works with respect to actual volatility let's take this since this is one of the since this is a major part of what we do and let's look at it to place earning trades earning plays in addition to our regular portfolio define risk trades limit potential profits and reduce risk when compared to undefined risk rates depending on the portfolio makeup and the size we towards defined risk the other day in who did we do the day before it soon by 2 I did to find rest rates and sometimes you know will do undefined rest trades the class night in Facebook it just depends especially surrounding earnings where outlier moves may occur you know you have to keep your eye on Baidu actually because well it's done down six down six dollars well we're long put spread in there correct we're long a bunch of put spreads near that we own up basically for free mm-hm and you can see I'm you can check to see where they're trading but we'll take a look in a second so let's go to the next slide so we decided to conduct a study analyzing earnings on five underlines we chose Apple Netflix Amazon price line and what's ma that's MasterCard correct going back two years we looked to each earning cycle and place to find and undefined risk trades in the portfolio and we trade all these except for except for MasterCard certainly we don't trade it's expensive stock it's not as liquid as I would like but at least it worked good for the it was interesting because it was expensive stock we'd get better examples on it more expensive stocks more capital required easier to use to find risk makes a little more sense correct let's go to slide number five please so the trades we placed we looked at the money butterfly with the long strikes just outside the expected move we looked at the an iron Condor with the short strikes just outside the expected move one strike wide same strikes we would use for the butterfly and then we looked at the strangle with the short strike just outside the expected move the expected move remember is is about a one standard deviation move correct so now the short strikes were at the money for the butterfly and the strangle the outside the expected move for the iron Condor the short strike was right at those other long strikes so if the butterfly was going wide out here and these were the ones that were buying for the iron Condor these were the ones we were selling apples to apples correct okay that's all it was it's just apples to apples there's nothing there's no trickery here it's just hey let's compare apples to apples it makes them so again cold down almost $2 it really helps our yes it does so defined risk and earnings let's do it at the money butterflies your P&L for one contract this is five years worth of studies okay your P&L for one contract $2,400 the iron Condor 8300 I'm sorry eight hundred and thirty dollars a twenty three and this strangles seventy two hundred forty-one dollars and then look at the percentages across all this does is we have to we have to deal with good times and bad times and we have to look at things in a historical perspective based on number of occurrences and we have to get people to understand that again we could look at history we can look at history and we can use history to at least know were strategically consistent with whatever with whatever the odds say they are that's all it's important are we strategically consistent if we hit on forty-seven percent of these big wide butterflies and the answer is yes okay because that's essentially the target are we strategically consistent if we do one standard deviation iron condors small well it should be 68 is 62 the butterfly should be around 42 it's 47 or it should be 40 or 42 it's about 47 this triangle should be about 60 a little over 68 at 77 these are all consistent with the more risk you take the better the return is over the expected return the less risk you take which is the iron Condor then you receive a little bit less than the expected return but if you take a look through through all these numbers biggest wins biggest losses I mean not too many people are willing to take a five thousand dollar loss of strangled know it's a big enough so one lot yes it's $50 but it freaks people out so I don't wanna make it seem like this is any kind of a lay up by any stretch of the imagination that's a Google trade yes okay but again this is this is over five years and yet and and the question and the answer has to be over five years this stuff work obviously it does okay beautiful let's go next slide next we looked at how the portfolio performed if we reduce risk further by widening the strikes further if we reduce the risk by widening strikes further it actually improves the probability success doesn't necessarily if you improve the probability success you could argue that reducing risk I would say that more importantly than reducing risk you improve the probability success placing the same trades as before we adjust the short strikes the long strikes on the butterfly by moving out additional two strikes beyond the expected move so the question here becomes can we tweak this and make it even more interesting let's go next slide so here the at-the-money butterfly paid almost 8000 was the best trade on the board by just barely ramping up the percent of winners this strangle actually went down because the losses were the bad losses were still there okay but there were a few you know but it just didn't pay as much and the iron Condor was virtually the same right so so but the iron Condor by moving the strikes out the statistical chance of success went from 62 to 80 and ended of the strangle went from high 70s to mid 80s so the statistical chances all worked out by moving out the strikes hey there's it I mean the math works this is this is a great market measure it needs to be played multiple times for everybody because you get to see that over five years the math works all you care about is the math works I did a class the other day I don't remember where I was but I was doing a class that I explained I think it was in Chicago and I explained that all we can do and this is amazing that you could even do this but all we can do Tony is deliver a methodology and or criteria that takes us to where we can create more winners than losers consistently and consistent with what our with what our strategy says it's going to be all we can do is prove concept the P&L piece that's that just depends like listen here's the crazy thing let's say you listen to everything we did this week and you decided to not do Google and do everything else your monster we're the greatest in flag oh we're geniuses beyond belief this is the greatest thing you just found God sure okay if you the other simulation but yes whatever it the other side to this is if you just did Google say we stink the worst ever it's terrible the worst ever you couldn't be any worse I hate you huh okay I got it this is the nature of the business you have to deliver consistency these are these are 35 occurrences 30 each one of these is 35 occurrences over five years with the wider strikes can you go back to slides the most important for here these are 40 occurrences all we're trying to do 40 occurrences of each spread all we're trying to do is to create enough historical validation that we can go and say hey if we do these big white butterflies and we're consistent about it 50 percent of the time depending how wide we make the strikes even if we widen out and pay a little more we're gonna hit we're gonna we're gonna be in the game and over five years we're gonna have a great return on capital there's a reason we made money in this business for 30 some odd years because we don't aren't focused on what happened yesterday correct we just at the end of the year I have to know I'm gonna be up money so I'm betting on a bet not it don't let me down back okay so at the money butterflies iron condors strangles okay the percentages over time over five years over the right number of occurrences they play out and if you widen the strikes and improve your probability of success go to the slide number eight please today is a very good day there's if you go to slide number eight out of 35 occurrences because you widen the strikes out every one of these should be better and they are the PNL is not necessarily better they're supposed to defend mine to support the entire argument that this is not a P&L discussion this is a discussion about creating winners and then learning how to manage the P&L from those winners over time time and time but you widen out the strikes you create a greater number of winners again this was a great study because because it validates so much that we've done throughout the years awesome and and again you can look at the standard deviation of P&L you can look at the average credit or debit so you get an idea we talked about $14 butterflies here that's right you know we're talking about $5 strangle so these are big big these are big kids but okay so it's not a 50-cent trade here well these aren't because they're expensive stocks these are big losses these are big wins and again the consistency in here it's the most important thing is the consistency now as we learn more and more we can become more more consistent because as we learn more we're going to hone our skills to note almost the best the optimal time to exit which should improve our P&L very good sir

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Keywords: tastytrade, tastytrade.com, tasty trade, tastytrade network, tom sosnoff, tony battista, finance, options trading, how to trade options, trading options successfully, tastytrade options, financial investment, stock market, Get Tasted, Market Measures, Defined Risk, Earnings, Options Strategies (Consumer Product)

Id: zcvF2n6jjeY

Length: 11min 38sec (698 seconds)

Published: Thu Oct 31 2013