EARNINGS DAY OPTION STRATEGIES – IV PLAY – PART V

Today, the May 29th, 2017, is a power packed day with earnings results of BEL, BHEL, LT, CAOLINDIA, AUROPHARMA, POWERGRID, NTPC, OIL, and PFC which are part of NSE FNO. We will take a look at non-directional Earnings Day option strategies to take advantage of high IVs. OIL 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 mean 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 26th May 2017

IV Rank & IV Percentile of Stocks on 26th May

Only two stocks AUROPHARMA & BEL have their IVPs above 90 & therefore can be further analyzed to see if we can use them in our options strategies. Today, I’m making an exception for BHEL despite its IVP not being above 90 (on 26th May) is because its intra-day IV today (29th May) is much higher & can easily have IVP above 90. You can check intraday IVs of stocks (with earnings results) on Intraday IVs Page

 

AUROPHARMA

Straddle of Aurobindo Pharma

At the current time, Aurobindo Pharma spot price is quoting at 513.1 and nearest ATM option strike is 520. So, we short one 520 strike put option and one 520 strike call option.

1 AUROPHARMA 520  call option  premium = 31.9(call price) X 700 (lot size) = 22,330

1 AUROPHARMA 520 put option  premium = 36 (put price) X 700(lot size) = 25,200

Total Premium = 22,330 + 25,200 = 47,530

47,530 is the total premium obtained by selling the AUROPHARMA 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 452 (-11.89%) on the downside or above 587 (+14.56%) on the upside. As you can see, the protection range of this strategy is good 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 beyond that protection range.

Here is the payoff of Straddle of AUROPHARMA

Payoff for AUROPHARMA Straddle

Update on AUROPHARMA Straddle Strategy post-results

Let’s calculate the Profit/Loss (P&L) of the Straddle strategy of AUROPHARMA by checking the premium of 520 strike call & put options which we have shorted before the result.

1 AUROPHARMA 520 call option  premium = 47 (call price) X 700(lot size) = 32,900

1 AUROPHARMA 520 put option  premium = 13 (put price) X 700(lot size) = 9,100

Total Premium = 32,900 + 9,100 = 42,000

Profit/loss = 47,530 (Original Premium) – 42,000 (Premium post-result) =5,530

We have made a tidy profit of 5,530 on the AUROPHARMA 520 straddle even as the stock moved sharply post-results & IVs dropped decently.

Strangle of Aurobindo Pharma

At the current time, AUROPHARMA spot price is quoting at 541.95. So, we short one 1SD move OTM strike 440 put option and one 620 strike call option.

1 AUROPHARMA 620  call option  premium = 8.05 (call price) X 700 (lot size) = 5,635

1 AUROPHARMA 440  put option  premium = 7 (put price) X 700 (lot size) = 4,900

Total Premium = 5,635 + 4,900 = 10,535

10,535  is the total premium obtained by selling the AUROPHARMA strangle. The maximum profit obtainable from this strategy is the total premium received and will happen when the stock price at expiry is between 440 and 620.

The pay-off for this strategy shows that we will start losing money if the stock moves & expires below 425 (-21.58%) on the downside or above 655 (+20.86%) on the upside. As you can see, the protection range of this strategy is the best one can get and premiums are also decent. So it makes sense to enter this trade as risk reward is highly favorable. But we aware of risks as well.

Here is the payoff of Strangle of AUROPHARMA

Payoff for AUROPHARMA Strangle

Update on AUROPHARMA Strangle Strategy post-results

Let’s calculate the Profit/Loss (P&L) of the Straddle strategy of AUROPHARMA by checking the premium of 620 strike call & 440 strike put options which we have shorted before the result.

1 AUROPHARMA 620 call option  premium = 7.6 (call price) X 700(lot size) = 5,320

1 AUROPHARMA 440 put option  premium = 2.6 (put price) X 700(lot size) = 1,820

Total Premium = 5320+ 1820 = 7140

Profit/loss = 10,535 (Original Premium) – 7,140 (Premium post-result) =3,395

We have made a decent profit of 3,395 on the AUROPHARMA strangle despite a sharp move in the stock post-resultsdue to IV crush.

BHEL

Straddle of BHEL

At the current time, BHEL spot price is quoting at 156.1 and nearest ATM option strike is 155. So, we short one 155 strike put option and one 155 strike call option.

1 BHEL 155 call option  premium = 10 (call price) X 5000(lot size) =50,000

1 BHEL 155 put option  premium = 8.25 (put price) X 5000(lot size) = 41,250

Total Premium = 50000 + 41250 = 91,250

91,250 is the total premium obtained by selling the BHEL straddle. The maximum profit obtainable from this strategy is the total premium received and will happen when the stock price at expiry is 155.

The pay-off for this strategy shows that we will start losing money if the stock moves & expires below 136.8(-12.36%) on the downside or above 173.2 (+10.95%) on the upside. As you can see, the protection range of this strategy is good and premiums are also very good. One can enter this trade as it makes good sense but one must be aware of risks involved if the stock moves violently beyond that protection range.

Here is the payoff of Straddle of BHEL

Payoff for BHEL Straddle

Update on BHEL Straddle Strategy post-results

Let’s calculate the Profit/Loss (P&L) of the Straddle strategy of BHEL by checking the premium of 520 strike call & put options which we have shorted before the result.

1 BHEL 155 call option  premium = 2.3 (call price) X 5000(lot size) = 11,500

1 BHEL 155 put option  premium = 13.2 (put price) X5000(lot size) = 66,000

Total Premium = 11,500 + 66,000 = 77,500

Profit/loss = 91,250 (Original Premium) – 77,500 (Premium post-result) = 13,750

We have made a good profit of 13,750 on the BHEL 155 straddle even as the stock moved sharply post-results & IVs dropped only meagerly.

Strangle of BHEL

At the current time, BHEL spot price is quoting at 157.1. So, we short one 1SD move OTM strike 135 put option and one 180 strike call option.

1 BHEL 180  call option  premium = 2.55 (call price) X 5000 (lot size) = 12,750

1 BHEL 135  put option  premium = 1.4 (put price) X 5000 (lot size) = 7,000

Total Premium = 12,750 + 7,000 = 19,750

19,750 is the total premium obtained by selling the BHEL strangle. The maximum profit obtainable from this strategy is the total premium received and will happen when the stock price at expiry is between 135 and 180.

The pay-off for this strategy shows that we will start losing money if the stock moves & expires below 131.1 (-16.55%) on the downside or above 183.9 (+17.05%) on the upside. As you can see, the protection range of this strategy is excellent and premiums are also very good. So it makes sense to enter this trade as risk reward is highly favorable. But we aware of risks as at all times & in each and every strategy.

Here is the payoff of Strangle of BHEL

Payoff for BHEL Strangle

Update on BHEL Strangle Strategy post-results

Let’s calculate the Profit/Loss (P&L) of the Straddle strategy of BHEL by checking the premium of 180 strike call & 135 strike put options which we have shorted before the result.

1 BHEL 180 call option  premium = 0.7 (call price) X 5000(lot size) = 3,500

1 BHEL 135 put option  premium = 3.5 (put price) X5000(lot size) = 17,500

Total Premium = 3,500 + 17,500 = 21,000

Profit/loss = 19,750 (Original Premium) – 21,000 (Premium post-result) = -1,250

Here we got a loss of 1250 on the BHEL strangle as the stock moved down strongly by 12%. Though ideally, the stock didn’t move beyond our protection range on the downside (131), we will still exit it a small loss, who knows if it moves down by another 5% in the next trading session.

BEL

Straddle of BEL

At the current time, BEL spot price is quoting at 174.4 and nearest ATM option strike is 180. So, we short one 180 strike put option and one 180 strike call option.

1 BEL 180 call option  premium = 6.5 (call price) X 4500(lot size) =29,250

1 BEL 180 put option  premium = 11.4 (put price) X 4500(lot size) = 51,300

Total Premium = 29250 + 51300 = 80,550

80,550  is the total premium obtained by selling the BEL straddle. The maximum profit obtainable from this strategy is the total premium received and will happen when the stock price at expiry is 180.

The pay-off for this strategy shows that we will start losing money if the stock moves & expires below 162.2(-7%) on the downside or above 197.9 (+13.47%) on the upside. As you can see, the protection range of this strategy is good and premiums are also very good. One can enter this trade as it makes good sense but one must be aware of risks involved if the stock moves violently beyond that protection range.

Here is the payoff of Straddle of BEL

Payoff for BEL Straddle

 

Update on BEL Straddle Strategy post-results

Let’s calculate the Profit/Loss (P&L) of the Straddle strategy of BEL by checking the premium of 180 strike call & put options which we have shorted before the result.

1 BEL 155 call option  premium = 5.05 (call price) X 4500(lot size) = 22,725

1 BEL 155 put option  premium = 10.75 (put price) X 4500(lot size) = 48,375

Total Premium = 22,725 + 48,375 = 71,100

Profit/loss = 80,550 (Original Premium) – 71,100 (Premium post-result) = 9,450

We have made a good profit of 9,450 on the BEL 180 straddle despite IV od the stock didn’t drop sharply post-results.

Strangle of BEL

At the current time, BEL spot price is quoting at 173.6. So, we short one 1SD move OTM strike 160 put option and one 200 strike call option.

1 BEL 200  call option  premium = 1.75 (call price) X 4500 (lot size) = 7,875

1 BEL 160  put option  premium = 2.95 (put price) X 4500 (lot size) = 13,275

Total Premium = 7,875 + 13,275 = 21,150

21,150 is the total premium obtained by selling the BEL strangle. The maximum profit obtainable from this strategy is the total premium received and will happen when the stock price at expiry is between 160 and 200.

The pay-off for this strategy shows that we will start losing money if the stock moves & expires below 155.4 (-10.48%) on the downside or above 204.7 (+17.91%) on the upside. Though the protection range of this strategy is skewed more towards the upside, is still good and premiums are also very good. Risk reward is favorable for this trade & can be entered. Respect risk and be aware of pitfalls in the strategy.

Here is the payoff of Strangle of BEL

Payoff for BEL Strangle

Update on BEL Strangle Strategy post-results

Let’s calculate the Profit/Loss (P&L) of the Straddle strategy of BEL by checking the premium of 180 strike call & 135 strike put options which we have shorted before the result.

1 BEL 200 call option  premium = 1.4 (call price) X 4500(lot size) = 6,300

1 BEL 160 put option  premium = 2.0 (put price) X 4500(lot size) = 9,000

Total Premium = 6,300 + 9,000 = 15,300

Profit/loss = 21,150 (Original Premium) – 15,300(Premium post-result) = 5,850

Here we gained a profit of 5850 on the BEL strangle as the stock barely moved and IVs dropped marginally.

As the spot price keep changing & the IVs keep changing, one may not get exact payoff graph if one tries now but should be by & large similar.

 

Conclusions

Using the IV based option strategies on Earnings we have made a profit in 5 out of 6 trades. The loss in BHEL strangle is due to very sharp move in the stock post-results. As I keep saying in numerous posts, no matter how much protection range you have in straddles & strangles, there is always risk lurking around. So be ready for such eventualities and have a risk plan before entering such strategies.

Posted in Options, Stocks.

6 Comments

  1. Hi Raghunath,

    Couple of questions on the above trade,
    1. When should i enter the trade for these strategies ? it is a day before results or On the morning of results day ?
    2. How are you calculating 1SD move for stocks in case of strangle? could you please share how are you doing it

    • You can enter a day before or the morning of the results day. I prefer morning of the results day as IVs are usually high during that period.

      1 SD Move = SpotPrice x (Stock IV/100.0) x Days to Expiry/365

    • On the day of trade entry IVP of Auro was still above 90. IVP is calculated by comparing the current IV to its historical IV over last 6 months. For calculating stock IV I choose ATM and two OTM options.

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