Earnings Day Option Strategies – Implied Volatility Play – Part II

Today, the May 17th 2017, are the earnings results day of HINDUNILVR (Hindustan Unilever) & JSWSTEEL (JSW Steel) which are part of NSE FNO. We will take a look at non-directional Earnings Day option strategies that one can employ on these stock options and what is probability of profit and the risks involved.

First, let’s begin by checking whether the IVs have spiked in these stocks by looking at their IV Rank (IVR)  & IV Percentile (IVP) .

IVR and IVP will rank the current IV of the stock over the IV of past 6 months. Higher ranking means higher IVs and expensive premiums.

For the straddle and strangle strategies to work out we need stocks to have IV Percentile above 90.

This is the IVR & IVP table for NSE stocks  with IVP>90 at end-of-day of 16th May, 2017

IV Rank & IV Percentile - Earnings Day Option Strategies

IV Rank & IV Percentile of Stocks on 16th May

Not so surprisingly, both HINDUNILVR & JSWSTEEL are top two IV percentile stocks with IVP of 100 & 99.44 respectively since there is high uncertainty surrounding their earnings results. Ideally, both are good to do earnings report day strategy on them.

You can track Intra-Day implied volatility of Stocks on their Earnings report day here.

HINDUNILVR

Hindustan Unilever has an IVP of 100 and is perfect for earnings day options strategy.

Straddle of Hindustan Unilever

At current time, HINDUNILVR spot price is quoting at 996 and nearest ATM option strike is 1000. So, we sell one 1000 put option and one 1000 call option.

1 HINDUNILVR 1000  call option  premium = 19.8 (call price) X 600 (lotsize) = 11,880

1 HINDUNILVR 1000  put option  premium = 20.05 (put price) X 600 (lotsize) = 12,030

Total Premium = 11,880 +12,030 = 23,910

23,910 is the total premium obtained by selling the HINDUNILVR straddle. The maximum profit obtainable from this strategy is the total premium received and will happen when the stock price at expiry is 1000.

The pay-off for this strategy shows that we will start losing money if the stock moves & expires below 960 (-3.59%) on the downside or above 1040 (+4.4) on the upside. As you can see, the protection range for this strategy is very low and a potential move of 4% on either side, which is quite frequent on results day, can lead to quick loss. Reason for such low pay-off in this strategy is due to lower premiums of options as we are close to expiry of this month’s contracts. Since this trade strategy is very risky, I’m not entering this trade.

Here is the pay-off of Straddle of HINDUNILVR

Pay-off for Hindustan Unilever Strangle

Strangle of Hindustan Unilever

At current time, HINDUNILVR spot price is quoting at 1004.25. So, we sell one 1SD move OTM strike 1050 call options & one 1SD move OTM strike 950 put option.

1 HINDUNILVR 1060 call option  premium = 4.75 (call price) X 600 (lotsize) = 2,850

1 HINDUNILVR 950 put option  premium = 3.3 (put price) X 600 (lotsize) =1,980

Total Premium = 2850 +1980= 4830

5,160 is the total premium obtained by selling the HINDUNILVR strangle. The maximum profit obtainable from this strategy is the total premium received and will happen when the stock price at expiry is between 942 and 1068.

This strategy will start losing money if the stock moves & expires below 942 (-6.2%) on the downside or above 1068 (+6.35) on the upside.

Again, the protection range for the strategy is less than usual and risk of losing is higher. Risk Reward is not favourable in this strategy of HINDUNILVR and therefore not entering this trade

Here is the pay-off of Strangle of HINDUNILVR

Pay-off for Hindustan Unilever Strangle

Update on Hindustan Unilever Straddle & Strangle Strategy post-results

Though we haven’t entered the trades in the HINDUNILVR due to high risk factor but if we had entered those trades, Straddle strategy would have given a profit of  6,720 bucks while Strangle strategy would have yielded a profit of 2,910. This has happened mainly due to sharp drop in IVs of options post-results and stock not moving strongly in either direction. Profit in this case by no means a license to enter such risky trades which if they go against you can wipe-out the all the profit gained from 10 such trades in a single go.

JSWSTEEL

JSW Steel has an IVP of 99.44 and is perfect for earnings day options strategy.

Straddle of JSW Steel

At current time, JSWSTEEL spot price is quoting at 208.4 and nearest ATM option strike is 210. So, we sell one 210 put option and one 210 call option.

1 JSWSTEEL 210  call option  premium = 6.7 (call price) X 3000 (lotsize) = 20,100

1 JSWSTEEL 210  put option  premium = 7.25 (put price) X 3000 (lotsize) = 21,750

Total Premium =  20,100 + 21,750 = 41,850

41,850 is the total premium obtained by selling the JSWSTEEL straddle. The maximum profit obtainable from this strategy is the total premium received and will happen when the stock price at expiry is at 210.

The pay-off for this strategy shows that we will start losing money if the stock moves & expires below 196.1 (-5.9%) on the downside or above 223.9 (+7.44) on the upside. As you can see, the protection range for this strategy is much better than Hindustan Lever and therefore entering this particular trade.

Here is the pay-off of Straddle of JSWSTEEL

 

Pay-off for JSW Steel Straddle

Update on JSW Steel Straddle Strategy post-results

First let’s calculate the Profit/Loss (P&L) of the Straddle strategy of JSW Steel. So, we check the premium of 210 strike call & put options which we have shorted before the result.

1 JSWSTEEL 210 call option  premium = 11.25 (call price) X 3000 (lotsize) = 33,750

1 JSWSTEEL 210 put option  premium = 2.65 (put price) X 3000 (lotsize) =7,950

Total Premium = 33,750 + 7,950 = 41,700

Profit/loss = 41850 (Original Premium) – 41700 (Premium post-result) = 185

So, we haven’t gained anything from the straddle strategy of JSW Steel.

Strangle of JSW Steel

At current time, JSWSTEEL spot price is quoting at 208.6. So, we sell one 1SD move OTM strike 225 call options & one 1SD move OTM strike 190 put option.

1 JSWSTEEL 225 call option  premium = 2.2 (call price) X 3000 (lotsize) = 6,600

1 JSWSTEEL 190 put option  premium = 1.05 (put price) X 3000 (lotsize) =3,150

Total Premium = 6,600 +3,150= 9750

9750 is the total premium obtained by selling the JSWSTEEL strangle. The maximum profit obtainable from this strategy is the total premium received and will happen when the stock price at expiry is between 186 and 228.

This strategy will start losing money if the stock moves & expires below 186 (-10.45%) on the downside or above 228(+9.4) on the upside.

The protection range for this strategy is very good & therefore entering this trade.

Here is the pay-off of Strangle of JSWSTEEL

Pay-off for JSW Steel Strangle

Update on JSW Steel Strangle Strategy post-results

First let’s calculate the Profit/Loss (P&L) of the Strangle strategy of JSW Steel. So, we check the premium of 225 strike call options & 190 strike put options which we have shorted before the result.

1 JSWSTEEL 225 call option  premium = 1.80 (call price) X 3000 (lotsize) = 5,400

1 JSWSTEEL 190 put option  premium = 0.7 (put price) X 3000 (lotsize) =2,100

Total Premium = 5,400 + 2,100 = 7,500

Profit/loss = 9750 (Original Premium) – 7500 (Premium post-result) = 2250

We have gained a profit of 2,250 bucks on strangle strategy of JSW Steel. Theoretically, if you hold this position till expiry and the stock price stays within 190 -225 range you can get the maximum profit of Rs 9750 but since we want to square-off immediately post the results, it is wise to take the profit and move on to the next trade.

 

Posted in Options, Stocks.

8 Comments

  1. Pingback: Buying Options into Earnings Results Day - Implied Volatility Play | TradersLounge

  2. Sir, You did not reveal how do you calculate the pay off % which deciding to enter or not to enter the trade, the same you did in HINDUSTAND LEVER case . Kindly explain the calculation about PAYOFF % .

  3. So why was the 1SD strangle not good enough a range in the case of Hindustan Lever? Also what kind of range are you looking at for earning day trades (which are intraday I’m assuming) Like JWS had a +7 n -5% protection in case of the straddle while 10% or so in case of the strangle… so is there any specific number you would consider to be safe?

    • 1SD which is around 68% POP can get taken out easily if stock moves sharply post-results. I try to target a POP of 80% and if it goes against the trade even then, I try to manage it by rolling up or down the untested side.

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