DNA: unexpected result

I hope someone can answer this question. Yesterday I bought front month 90 calls on DNA at 0.30 (closed at 0.35, underlying price 83.5). Theta was -0.11. Today on a good earnings report, DNA is up around 2.5 points and the ivolatility.com calculator shows the 90 calls at 0.62.

Actual price is 0.10. What is the reason for the difference? What is the best way to play short term earnings moves (i.e. overnight) without taking on high risk if the report is adverse?

Data: delta 0.19, gamma 0.06, theta -0.15, vega 0.02, rho 0.002, volatility 47%

Thanks

Kevin

kevino said:

I hope someone can answer this question. Yesterday I bought front month 90 calls on DNA at 0.30 (closed at 0.35, underlying price 83.5). Theta was -0.11. Today on a good earnings report, DNA is up around 2.5 points and the ivolatility.com calculator shows the 90 calls at 0.62.

Actual price is 0.10. What is the reason for the difference? What is the best way to play short term earnings moves (i.e. overnight) without taking on high risk if the report is adverse?

Data: delta 0.19, gamma 0.06, theta -0.15, vega 0.02, rho 0.002, volatility 47%

Thanks

Kevin

Click to expand...

What IV level did you buy at????

Kevino

By my calculation using July05 expiry (option 0.35, underlying 63.5) you around paid 50% IV. Following results (option 0.10, underlying 62.0) the IV was 25.7%.

Often going into a results period the IV gets pumped up in anticipation of a big underlying move / increased volatility. If / when unexciting results are released the IV implodes and with it the option price. It's very strange watching the underlying rise and a call value fall, but it sometimes happens, for the above reason.

Near time and OTM options being extremely sensitive, are highly leveraged monsters ! Meaning you'll either multiply your long stake several times over, or lose the lot. Be very VERY careful shorting this type of option - it can wipe you out if you're on the wrong side directionally !

Thanks for the reply Profitaker,

So the volatility contraction is what killed me. All the OTM calls were down yesterday for every expiry date. I guess the best way to play these reports is with ITM options that move 1:1 with the underlying.

Kevin

I think sometimes we overcomplicate options with all the greeks etc. I agree with the posts about drop in volatility but there may be a simpler way to think about things. Remember the basic components of option price - intrinsic value and time value. Buying OTM you are paying time value. When results are about to come out or surprising results have just come out option prices are bid up with high time value because there are lots of traders hoping for a substantial move. When a days worth of move has happened the news is then priced in and if the option is near expiration and still OTM it's not going to be worth much as there is little chance of more upside to take it ITM particularly in the current overbought conditions.

I sometimes find it easier to think in these terms rather than thinking will IV go up or down as the initial thought might be that Volatility will go up due to the price move expected.

To response to the other part of your question I believe the best way to trade earnings is trading the stock itself in the pre or post market as the earnings come out. You absolutely must have a top class direct access broker, very good level 2 and order execution skills in illiquid markets or you will get killed. You also must be able to interpret the results yourself instantly and make decisions understanding what part of the earnings moves markets. These are not easy skills but there is definitely money to be made there for the dedicated student and I certainly do not agree with those that might tell you it is simply gambling.

All personal opinion only of course, good luck


Gareth

Thanks for the practical info Gareth,

I checked the aapl calls this morning after they reported and the front month OTM got crunched but all the others had nice gains, even the OTMs. I will monitor options behaviour for other earnings reports but also look at your idea of trading in the pre-market.

Kevin

kevino said:

What is the best way to play short term earnings moves (i.e. overnight) without taking on high risk if the report is adverse?

Click to expand...

If ever you find the answer to that one please let me know !

x

Options are over complicated with Greeks??? please don't trade another option in your life!!!! they teach greeks to shcool kids now!!!!!! amazing

Anyway, there is the general negative correlation betweek underlying and IV, but I think it has been put nicley previously.....

Profitaker said:

If ever you find the answer to that one please let me know !

Click to expand...

Try a vol trade.....

Robertral said:

Try a vol trade.....

Click to expand...

Robertral - where could I find info on this?

Thanks

Kevin

kevino said:

Robertral - where could I find info on this?

Click to expand...

Volatility trade - a spread designed to profit from changing IV - long if you expect IV to increase, short if you expect a decrease. In it's simplest form a straddle with the underlying trading at the straddle strike, but any spread that's delta neutral would also qualify.

Kevino said:

What is the best way to play short term earnings moves (i.e. overnight) without taking on high risk if the report is adverse?

Click to expand...

I'd like to know the answer to that one. Sure, you can tailor the risk to suit what you think is a likely scenario following results, but the bottom line is that your potential profits will ALWAYS be directly related to your risk.