Let’s start by running a scan of the stocks reporting earnings for the week. This includes an optional total volume indicator sorted from highest to lowest.
Click to focus on Citigroup and you’ll see the large-cap company reporting results in a diverse industry of banking before trading opens on Friday, July 15th.
The earnings and financials tabs show that the options market expects a 4.4% move in either direction. The move has been broken in two of the last 12 returns.
During that time, there was one post-earnings move outside the implied range. Long straddles were beneficial in such cases. The rest of the earnings move could have resulted in profitable short straddles. You can overlay quarterly financial data by clicking on the ratios below the Earning Moves graph. Let’s take a look at the PE ratio. This is the stock price divided by his earnings per share over the last 12 months.
C’s current PE ratio is 5.2, which is 20.7% below the average of the last 12 return observations. Back on the Overview tab, you can quickly run a scan to find the best options trades. Since revenue is just around the corner, we scan for a market-neutral strategy and set it between -3% and +3% to filter the scan results by S%, or a smoothed edge.
This allows you to narrow down your results to fair priced deals. The highest ranked deal is Iron Butterfly with 38, 44, and 50 strikes expiring on August 5, 2022 for $3.24 in credits.
By pulling up trades, we can see the theoretical value in more detail. The distribution edge found by the expected payoff in the stock’s historical distribution has a 6.8% edge. The predicted edge derived from historical volatility has an edge of 11.5%. Finally, the smoothed edge calculated by drawing the best-fit curve through the monthly implied volatility has a 0.0% edge. The edge is related to the mid-market price of the trade.
A larger positive edge is a theoretical advantage for the trader. You can also see the payoff graph. The profit probability sums the probabilities of the nodes in the portion of the payoff picture above the zero profit line over three standard deviations. For this trade, the profit probability is 57.76%. The reward for risk is the maximum profit divided by the maximum loss. Here 1.2 to 1 is the ratio of maximum profit of $322 to maximum loss of $-278. This iron butterfly has two break evens at 40.78 and 47.22. Full Greek and ThinkOrSwim code complete the information on the trading analysis pop-out.
Now let’s take a look at this trade in the trade builder. Last month, the stock price he fell 7.9% and his 30-day implied volatility he rose 10.6%. The average slope of the trendline is negative. The heatmap to the right of the graph is green where volatility and slope are underestimated and red where they are overestimated. In this case, short-term IV and slope are neutral, but long-term are overestimated.
This trade is also overlaid on the Monthly Implied Volatility graph in the Chains tab. The legs of this trade are circled. For any questions or issues regarding articles, please contact [email protected] subscribe to our dashboard, please visit https://orats.com/dashboard
Disclaimer:
The opinions and ideas presented herein are for informational and educational purposes only and should not be construed as representing trading or investment advice tailored to your investment objectives. You should not rely solely on what is provided here. We strongly recommend that you discuss any transaction or investment with your broker or investment advisor before executing. None of the information contained herein is a recommendation that any particular security, portfolio, trading or investment strategy is suitable for any person. Trading and investing in options involves risk and is not suitable for all investors.
About the author: Matt Amberson, principal and founder of Option Research & Technology Services, says: ORATS was born out of traders’ need to have access to more accurate and realistic options research. Matt launched his ORATS and supported his option his market his making company. There he recruited individuals interested in statistics, placed them on the floor, and developed research to assist in options trading. He is heavily involved in product design and quantitative research. ORATS offers data and backtesting on a subscription basis. www.orats.comMatt holds a master’s degree from the Kellogg Business School.
