Today, the May 19th 2017, are the earnings results day of ABIRLANUVO, ENGINERSIN, SBIN, JUSTDIAL and MOTHERSUMI which are part of NSE FNO. We will take a look at non-directional Earnings Day option strategies to make Implied Volatility play work in our favour. ABRLANUVO is excluded from the study due to lack of liquidity in its options.
First, let’s begin by checking their IV Rank (IVR) & IV Percentile (IVP) to see if their IVs have increased leading into the earnings result day.
Higher IVR and IVP ranking means higher IVs and better 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 18th May, 2017
All four stocks SBIN, JUSTDIAL, MOTHERSUMI & GRASIM have their IVPs above 90 & therfore can be further analyzed to see if we can use them in our options strategies
After having a look at the pay-off graphs of SBIN, MOTHERSUMI & GRASIM straddle and strangles its clear to me that risk reward is not good. The protection range is very narrow & a strong move of just 4-5% can bring loss to these strategies. So avoiding implied volatility play option strategies on these stocks. Only JUSTDIAL is showing some decent pay-off.
The main reason for these bad pay-offs in these stocks is not due to low IVs but due to lack of time value in the option premiums as we are getting closer to expiry. We could have done these strategies on next month options but they are not liquid. So we avoid doing any strategies on these stocks & just stick to JUSTDIAL.
Straddle of Just Dial
At current time, JUSTDIAL spot price is quoting at 520.6 and nearest ATM option strike is 520. So, we short one 520 strike put option and one 520 strike call option.
1 JUSTDIAL 520 call option premium =18.6 (call price) X 1200 (lotsize) = 22,320
1 JUSTDIAL 520 put option premium = 18.6 (put price) X 1200 (lotsize) = 22,320
Total Premium = 22,320 + 22,320 = 44,640
44,640 is the total premium obtained by selling the JUSTDIAL straddle. The maximum profit obtainable from this strategy is the total premium received and will happen when the stock price at expiry is 520.
The pay-off for this strategy shows that we will start losing money if the stock moves & expires below 482 (-7.27%) on the downside or above 557 (+7.0%) 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 JUSTDIAL
Update on JUSTDIAL Straddle Strategy post-results
Let’s calculate the Profit/Loss (P&L) of the Straddle strategy of JUSTDIAL by checking the premium of 520 strike call & put options which we have shorted before the result.
1 JUSTDIAL 520 call option premium = 3 (call price) X 1200(lotsize) = 3,600
1 JUSTDIAL 520 put option premium = 27 (put price) X 1200(lotsize) = 32,400
Total Premium = 3,600 + 32,400 = 36,000
Profit/loss = 44,640 (Original Premium) – 36,000 (Premium post-result) = 8,640
We have made a decent profit of 8,640 on the Just Dial 520 straddle as the stock hasn’t moved sharply much post-results & IVs dropped decently.
Strangle of Just Dial
JustDial options are illiquid to do a strangle as the far OTM options are not trading. So avoiding this strategy here.