Earnings Day Option Strategies – Implied Volatility Play – Part III

Today, the May 18th 2017, are the earnings results day of BANKBARODA(Bank of Baroda),  BAJAJ-AUTO (Bajaj Auto), CESC, CUMMINSIND (Cummins India) and IDBI which are part of NSE FNO. We will take a look at non-directional Earnings Day option strategies like short Straddles & short Strangles strategies to work Implied Volatility play work in our favour.

First, let’s begin by checking whether the IVs have shot up 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 17th May, 2017

IV Rank & IV Percentile - Earnings Day Option Strategies

IV Rank & IV Percentile of Stocks on 17th May

 

Four stocks out of five appear to have IVP > 90. I’m excluding CUMMINSIND from the analysis as the stock suffers from lack of liquidity due tho which it will become to get in and out of trades difficult which is essential for this strategy. Though I’m not posting the pay-off picture of straddle/strangle for BAJAJ-AUTO, but is very risk as the straddle/strangle positions offer little protection from any strong move in the stock due to low premiums. So, excluding BAJAJ-AUTO from the analysis as well. That leaves us with BANKBARODA and CESC which have IVP of 98.89 and 90.56 respectively.

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

 

BANKBARODA

Bank of Baroda has an IVP of 98.89 and is perfect for earnings day options strategy.

Straddle of Bank of Baroda

At current time, BANKBARODA spot price is quoting at 193.4 and nearest ATM option strike is 195. So, we short one 195 strike put option and one 195 strike call option.

1 BANKBARODA 195  call option  premium = 7.1 (call price) X 3500 (lotsize) = 24,850

1 BANKBARODA 195  put option  premium = 8.25 (put price) X 3500 (lotsize) = 28,875

Total Premium = 24,850 +28,875 = 53,725

53,725 is the total premium obtained by selling the BANKBARODA straddle. The maximum profit obtainable from this strategy is the total premium received and will happen when the stock price at expiry is 195.

The pay-off for this strategy shows that we will start losing money if the stock moves & expires below 179.7 (-7.08%) on the downside or above 210.3 (+8.74) on the upside. As you can see, the protection range for this strategy is very decent and premiums are also decent. So it makes sense to enter this trade but one must be aware of risks involved if the stock moves violently.

Here is the pay-off of Straddle of BANKBARODA

Pay-off for Bank of Baroda Straddle

Update on BANKBARODA Straddle Strategy post-results

First let’s calculate the Profit/Loss (P&L) of the Straddle strategy of BANKBARODA. So, we check the premium of 195 strike call & put options which we have shorted before the result.

1 BANKBARODA 195 call option  premium = 5.25 (call price) X 3500(lotsize) = 18,375

1 BANKBARODA 195 put option  premium = 5.7 (put price) X 3500(lotsize) =19,950

Total Premium = 18,375 + 19,950 = 38325

Profit/loss = 53,725 (Original Premium) – 38,325 (Premium post-result) = 15,400

We have made a decent profit of 15,400 on this straddle as the stock hasn’t moved much post-results & sharp IV drop.

Strangle of Bank of Baroda

At current time, BANKBARODA spot price is quoting at 193.95. So, we short one 1SD move OTM strike 175 put option and one 215 strike call option.

1 BANKBARODA 215  call option  premium = 1.7 (call price) X 3500 (lotsize) = 5,950

1 BANKBARODA 175  put option  premium = 1.4 (put price) X 3500 (lotsize) = 4,900

Total Premium = 5,950 + 4,900 = 10,850

10,850 is the total premium obtained by selling the BANKBARODA strangle. The maximum profit obtainable from this strategy is the total premium received and will happen when the stock price at expiry is between 175 and 215.

The pay-off for this strategy shows that we will start losing money if the stock moves & expires below 172 (-11.32%) on the downside or above 218.1 (+12.45%) on the upside. As you can see, the protection range for this strategy is very good and premiums are also decent. So it makes sense to enter this trade as risk reward is favourable.

Here is the pay-off of Strangle of BANKBARODA

Pay-off for Bank of Baroda Strangle

Update on BANKBARODA Strangle Strategy post-results

First let’s calculate the Profit/Loss (P&L) of the Strangle strategy of BANKBARODA. So, we check the premium of 215 strike call & 175 put options which we have shorted before the result.

1 BANKBARODA 215 call option  premium = 0.7 (call price) X 3500(lotsize) = 2,450

1 BANKBARODA 175 put option  premium = 0.55 (put price) X 3500(lotsize) =1,925

Total Premium = 2,450 + 1,925 = 4,375

Profit/loss = 10,850 (Original Premium) – 4,375 (Premium post-result) = 6,475

Again we have made a decent profit of 15,400 on this strangle as the stock didn’t move much post-results & IV dropped sharply.

Straddle of CESC

At current time, CESC spot price is quoting at 979.25 and nearest ATM option strike is 980. So, we short one 980 strike put option and one 980 strike call option.

1 CESC 980  call option  premium = 32(call price) X 1100 (lotsize) = 35,200

1 CESC 980  put option  premium = 28.6 (put price) X 1100 (lotsize) = 31,460

Total Premium = 35,200 + 31,460= 66,660

Total premium obtained by selling the CESC straddle is 66,660 & this is maximum profit obtainable from this strategy when the stock price at expiry is 980.

The pay-off for this strategy shows that we will start losing money if the stock moves & expires below 919.4 (-6.11%) on the downside or above 1040.5 (+6.25%) on the upside. As you can see, the protection range for this strategy is quite decent, so it makes sense to enter this trade but one must be aware of risks involved if the stock moves sharply in one direction.

Here is the pay-off of Straddle of CESC

Pay-off for CESC Straddle

 

Update on CESC Straddle Strategy post-results

First let’s calculate the Profit/Loss (P&L) of the Straddle strategy of CESC. So, we check the premium of 980 strike call & put options which we have shorted before the result.

1 CESC 980 call option  premium = 55.6 (call price) X 1100(lotsize) = 61,160

1 CESC 980 put option  premium = 9.3 (put price) X 1100(lotsize) =10,230

Total Premium = 61,160 + 10,230 = 71,390

Profit/loss = 66,660 (Original Premium) – 71,390 (Premium post-result) = -4,730

We have made a loss of 4,730 on this straddle. The situation could have been worse if one has waited for long after the results of CESC came out and stock moved down sharply by 15% this breaching our protection levels by a mile. That is why it is important to get out of straddle positions immediately after the results come out to avoid situations like this. If I would have left the position as is, then MTM loss would be close to 1 lakh.

Despite having a decent protection and premium for this strategy it failed because the stock moved sharply. And that is the risk which will always be there. Before entering into trades such as this be aware of all the possibilities and risks before hand, so you can be well prepared and take losses quickly before loosing too much.

Strangle of CESC

At current time, CESC spot price is quoting at 977.9. So, we short one 1SD move OTM strike 900 put option and one 1060 strike call option.

1 CESC 1060 call option  premium = 8.0 (call price) X 1100 (lotsize) = 8,800

1 CESC 900 put option  premium = 4.5 (put price) X 1100 (lotsize) = 4,950

Total Premium = 8,800 + 4,950 = 13,750

Total premium obtained by selling the CESC strangle is 13,750 and is the maximum profit obtainable from this strategy and will happen when the stock price at expiry is between 900 and 1060.

The pay-off for this strategy shows that the strategy will start losing money if the stock moves & expires below 887.5 (-9.24%) on the downside or above 1072.4(+9.66%) on the upside. As you can see, the protection range for this strategy is very good and premiums are also decent. So it makes sense to enter this trade as risk reward is favourable.

Here is the pay-off of Strangle of CESC

Pay-off for CESC Strangle

Update on CESC Strangle Strategy post-results

First let’s calculate the Profit/Loss (P&L) of the Strangle strategy of CESC. First, we check the premium of 1060 strike call option & 900 strike put option which we have shorted before the result.

1 CESC 1060 call option  premium = 13.1  (call price) X 1100 (lotsize) =14,410

1 CESC 900 put option  premium = 3.2 (put price) X 1100 (lotsize) = 3,520

Total Premium = 14,410 + 3,520 = 17,390

Profit/loss = 13,750 (Original Premium) – 17,390 (Premium post-result) = -4,180

We have made a loss of 4,180 on this strangle. Just like in the case of straddle, the situation he as well could have been worse if one has waited for long after the results of CESC came out and stock moved down sharply by 15% .

Will keep track & update the status if the strategies post-results

Posted in Options, Stocks.

One Comment

  1. I have never seen any other articles on the internet which explains everything so precisely. Thanks a ton for making our lives easier and learning through these case studies before losing big chunks of money.

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