Comments on: How to Play Alcoa (AA) Earnings?

By: Equinox

Equinox — Tue, 14 Apr 2009 19:34:40 +0000

AAPL (apple) to report earnings on 22 April. Any suggestions on how to profit from the surprise (pos/neg)?

By: Michael

Michael — Wed, 08 Apr 2009 16:59:32 +0000

I wasn’t taking a view on the relative size of the move. Just wanted to point out the view to anyone taking the trade (i.e. AA will move more than $0.87 in one direction).

Ping my email, I’ll forward you some more information.

By: OptionPundit

OptionPundit — Wed, 08 Apr 2009 14:48:28 +0000

Michael, Thanks for your comment. Your hypothesis turned out to be right. AA didn’t move and it was really faced with the worst case scenario i.e. stock didn’t move much.

I closed the trade almost for almost breakeven. How-
1) AA behaved what a technical chartists will love. I sold off the 3X long 7.5 calls for $0.80 to $0.81 at around 9.45am candle when intraday stochastic turn downward.
2) I bot back the short 2X 6 calls for almost break-even (though a little more waiting would have turned this into more gains, but no coulda woulda shoulda) at around 10:30am candle.

Net at best breakeven.

I however, will give a shot to the formula you have attached above. The broker I used for this trade was TOS and my IV were different than yours. It surely seems like that IVs at TOS are different.

Thanks again for a good discussion. More to come as I shall be playing more earnings this and next week.

Profitable Trading, OP

By: Michael

Michael — Tue, 07 Apr 2009 18:42:43 +0000

Forward vol is easy to calculate:
IVf = Sqrt( IV1*IV1*T1 + IV2*IV2*T2 ) / (T1-T2)

This is the expected volatility in the absence of the event. Note that this calculation does not take into account normal term structure.

The earnings move is then:
IVe = Sqrt( T1 * (IV1*IV1 – IVf*IVf) ) * Sqrt( 2 / pi ) / Sqrt(252)

You’ll notice that if you put IVf as the volatility into any option position (straddle, ratio, etc), you’ll get S0 * IVe as your break even points.

By: Michael

Michael — Tue, 07 Apr 2009 18:37:34 +0000

Which broker are you using? I have 119% for ATM April vol, and 103% for May (from Bloomberg). In TOS I see 119% for April and about 100% for May. Be aware that TOS calculates implied volatility incorrectly when a stock pays dividends. They use an annualized dividend yield (1.56 is what they input), i.e. they are assuming continuous dividends. The correct way to calculate implied volatility is using discrete dividends. AA pays a dividend on May 6, prior to May expiration. That will screw up the TOS implied vol calculation for May and onwards.