Just executed this strategy on overnight earnings for NVDA. I bought the OTM delta 20 call and put for protection. After earnings results, NVDA was down about 2.5% which was within the expected move. This netted me out over 100% ROC. I think the key thing with this strategy is to analyze stocks that typically stay within their expected move after earnings, and also buy the protective put/call based on past moves after earnings. Thanks Seth for this video, will keep you updated on my results with this strategy.
Fadi, you said you were going to keep him updated. What was your plan for that? You need something to trigger you to remember to keep him updated unless you have his email address or something and you are emailing him updates constantly
HD is a volatility candidate, credit 60 minutes prior to earnings Nov 19, ATM 237 with wings at 225, 250. Your AAPL slide: wings at 255 & 240, option table behind the text wing are at 255 & 230, btw.
This was enlightening! I never would have suspected that by reducing downside risk by pulling in the long wings more reward could be achieved. It is somewhat counterintuitive, but makes sense since less capital is at risk, hence less collateral is required. Thank you for this video Seth!
@@smbcapital I suppose the % chance of the trade going bad is increased with this strategy, though. No such thing as free lunch in trading! The real value in the video was not so much in the strategy itself, in my opinion, but in highlighting the need to provide collateral as a hidden variable to be taken into account.
I think you should do the analysis on the negative side as well. For example what if the earnings was not so good and AAPL falls to $200 or $190? Thanks!
I tend to favor butterflies and condors over iron butterflies and iron condors. I’m not quite sure why, but it’s been working well for me keeping me consistently profitable. However, I’ve always been curious to know what would happen if I began utilizing IB and IC’s more so in my trades. Any thoughts on when and why IB’s and IC’s should be used over regular butterflies/condors? What would happen if that trader used a butterfly instead of an iron butterfly?
I did a volatility crush by accident last week. Thursday just before market close I saw the puts on Disney were super high priced so I sold a $185 put with disney at $190 for $2.90 that was set to expire the next day. Got lucky because I did not realize earnings were that night and earnings were pretty good so in the morning the put dropped to 20 cents and I bought it back right after market open to book an easy $270 on a $18.2k investment. I know 1.5% isn't sexy but in 1 day I will take that ANY TIME! Loving the wheel so far...
Seth, the original trade needed higher capital but it was for only 24 hours. The % of profit is higher with your suggestion but the money, actual dollars is important. $5,370 vs $3,600. Don't you agree? The next recommendation is doubling the size of the trade from 10 contracts to 20 contracts. I read one of the blunders is taking huge positions. Is 20 contracts okay? How many contracts per trade do you think are too many? As always great content.
Hi Seth, in a lower comment response you had mentioned that there are tools which can enable one to locate underlyings that tend to have more inflated expected moves and tend to keep in a certain range {or for other underlyings in which it is the opposite case for the long side}. Could you mention any of these tools/filters, any that you would recommend? That would be much appreciated. Arigatou :)
Seth ..this was if the Stock wasn't expected to move much so we convert the short straddle to an Iron Butterfly. What is we have sthng like tsla or appl this time in 2021. Both are right around the corners .. am v keen what wud u recommend ...
the question, can you buy leaps calls in the money and then sell calls in indexes such as spx and ndx ? For example spx price is 4k, I will buy calls 2 years out strike price 3k and then sell calls weekly or 3 times weekly in spx? i know I can do that in spy but not sure in SPX or NDX. Thanks
From your experience, how many days before earning release the IV will start to climb? I am from overseas. It's hard for me to wait for the 15 mins or so before earning release.
simple for a lay person. are you suggesting doing an option call farther out from the earnings date instead of trading it on that day earnings are announced . earnings are announced on January 21. instead of trading that stock on January 21, set up a long call say on January 17 till after the earnings are announced?
This modification reduces the capital required but also greatly reduces the odds of having a profitable trade by reducing the net credit produced and increasing the odds that the stock goes over your protective call/put leading to a max loss. It worked because it was a mild reaction. A standard deviation move or more likely would have led to a losing trade. May be better off with an iron condor? Less premium collected but easier to position it so you have a strong chance of pulling in a profit and don’t have to luck out on a mild reaction.
I agree. I've been trading for a very long time and while I respect his suggestion, I would never place my strikes that close together, especially with this volatility. I even placed an Iron Dragonfly on an Earnings play this week and I Doubled the Expected Move and the price still Breached it.
Ha, for the little guy options are either a waste of time(low return) or an outright roll of the dice. The real options players are operating on insider information, (cough Trumps friends cough) or scheming on new traders playing the opposite trades.
I have a question. Using the aaple example. Since the stock went up it means the puts are all OTM...can we not just allow them expire worthless rather than buying them back???
Thank you for the information Seth, much appreciated. Does this strategy work better on large cap stocks compared to small cap? I tried this for GOOS last night before earnings and the IV didn’t decrease following earnings today(6/3). As for placing the wings in closer than an iron condor, is one ATR out adequate or is there a better range to consider? Thanks!
Hey there, great video! wanted to ask how do you determine how far/close the wings of the butterfly would be? In this video, 12.5 points from the price were the right wings for APPL but how do you determine it for any other tickers?
I believe, this is determined from the expected move. You can find it out by adding the next expiration straddle and strangle and divide by 2 you get the expected move. You then use that expected move to find how far the wings of your iron-butterfly
I think if you check out a “normal market” implied volatility, and take it into an account while you perform your potential profit calculations (with a specialized software of course), you will be able to estimate a desired implied volatility you’d like to sell. By the way, a spread is not a good option strategy when you sell IV. It can work only before earnings when IV is enormous.
Thank you for the video. I am a visual and audio learner. I missed most of the finer point on how to triple the profit because I was struggling to see the difference between the two strategies. It would help if the comparison was side by side and shown longer on the screen. Thank you again for all your teachings.
Buy wings farther out, in other words the better you are at predicting the future the greater your profit. You can trade a weekly and get in the day before expiration, or you can buy in earlier - as an example. Since time will devalue one side of a trade and increase another, the longer you are in it the cheaper your buy in and the higher premium you take in.
I think I missed something in the video, can someone please explain? please forgive my lack of understanding, I am still learning the selling options concept. But here is what I'm understanding. it cost him $3620 to open the position, and he received $8900 into his account wouldn't that only bring is trading account to +5280? And then the cost of closing the position is $5300 wouldn't that mean he lost $20? I feel like I missed something, but I've watched it three times and I am still not seeing it. Any guidance would be greatly appreciated, thanks in advance.
I went through some beginner Options concepts and one thing I seem to miss is, when I purchase an option do I hold till it expires to make a profit or loss, or can I profit or loss from selling (reversing?) the option back?
Sell the contract early if the profit is something you would lock in. You lose all extrinsic value from holding the contract to when it expires. If you are super confident about your position you can hold until expiration. You may sell to close the contract at a loss if you believe it will lose more.
Hey Cristianius, at the 5 minute mark of the video, the option chain shows 3 days until expiration. Look at the top of the chain. WKLY 1 (Nov 1). This trade is in about an hour before the market close and hour the next morning when the market opens. I learned this in SMB's Foundations course which I just recently started. Some think the course is expensive. On the surface, it may seem so. I look at it this way. I have learned so much from SMB and I am so much more confident and I can't wait for the next trading day. The investment you make is one good trade (or for some, one bad trade). Good luck with your trading.
1- WHY YOU EXERCICE THE PURCHASED OPTION BEFORE THE MATURITY? 2- HOW TO BE SURE THAT THE BUYER OF THE OPTIONS THAT I SOLD WILL BE EXERCISED BEFORE MATURITY?
The other thing I hate about options is you can’t trade them extended hours. There could be a big difference on earnings price at 8pm vs 9:30am next morning.
What would happen if the price ran past either of the long strikes? Take the loss, roll out in time, etc? The video was a good introduction but is incomplete imo. Thank you for all that SMB does!
Nothing. You will have earned your max profit because the short and the long options cancel each other out. That’s what happens in a normal situation. Here, we see that the value of all of the options would have gone down entirely because of the drop in volatility that happens in after earnings. This means even if your options go far in the money, you still get a good profit because they’re valued less. You would just have to close the contracts before you get assigned, considering the expiration day was so near.
@@ricardofranco7419 Thank you for the reply. You are right, so from there, the question would be: how often does that happen? We'd need some backtesting to get an idea of whether or not an edge exists. The video is a good intro but only 1 component of a potential vetted strategy.
@@ricardofranco7419 This is not true. Look at the results if AAPL traded well above or well below the protective options. The margin the broker required you to put up would all be lost.
I think this is where backtesting on stocks to where you can apply the strategy as there are stocks that really explodes on either sides more than the expected move. AAPL is just one of those that really does not move too much after earning is reported and thus iron-butterfly is good to deploy right before ER
depends on the duration of the option and other factors... you could shift the losing leg out farther if you think the trend will not continue or chase the trend with the winning side to reduce losses or potentially turn it into a net positive. If it is a yolo stock like TSLA then having small wings doesn't make sense.
Traders tend to forget and the presenters of strategies don't like to mention the fact that, because the options are not actually trades of stock, but rather "speculations", there are always traders on the other side of the winners. If you increased your capital by 10K, someone else decreased their capital by that same amount. It's a statistical game. Therefore, just like many commented, in his employee's version of the trade, there was more "insurance" built in, and thus, less potential profit; however, if the underlying stock did pop or dip beyond the long strike points, then in his employee's version, they would not lose as much capital. He got lucky that the stock did not move that much. that was the correct assumption. There is no eye-opening information there, is there?
"ok google what is apple historical maximum price" -The all-time high Apple stock closing price was 180.68 on January 03, 2022. The Apple 52-week high stock price is 176.15, which is 7% above the current share price. The Apple 52-week low stock price is 124.17, which is 24.6% below the current share price. The average Apple stock price for the last 52 weeks is 149.41.
The tradeoff for shorter wings is higher profit potential for a lower win%. If you're right with the short wings you do much better but you will also lose more often if it's a consistent strategy you trade than with wider wings
Hi Seth, Great video and thank you for all the informative content. Now, I understand most of the concepts and have implemented it in a few trades of my own. A questions I have though is how many days to expiration do you recommend? When I do this options strategy I do it sometimes on a Thursday when the underlying is having earnings released that day after closing/the next day Friday before market hours. Being a one day trade expiring the next day it is sometimes nerve racking. Would you recommend instead trading the next week's weekly option chain to have a little more time and taking in slightly less premium? Thanks in advance!
What if AAPL went up after earnings.. Instead of mild jump, if it was ripping up to 255 what would have been the outcome of this butterfly ? same case if the price dropped to 230
Recently I found a trend of stock price declining after dividend payment. Has anyone back tested buying a put at the date of dividend payment and then a call after signs of a reversal?
no free food, if the price goes to a long call/put strike you lose all your money, so yes, you increase the reward at the expense of increased risk. I mean, you can just not close the first trade and slowly make money from theta decay...
Ok, I'm just what the heck. I thought I knew English. My brains just got into a knot, my eyes are crosses and I'm drooling. He just yanked my logical and balanced though process with this gibberish he just explained. I feel so dumb and I don't feel like that easily. I know it will take time to settle this brain wrestle he just gave me but I'll survive (with therapy). I just have to study more about options and the wings of the stock I guess.
Right, except that if it was a blowout earnings or a huge miss and blew past the protective longs, your shorter wings trade would've had greater losses as goodbye to the margin you put up. In the longer wings scenario, you may still have had a profit depnding on IV crush if it didn't breach the protective longs. It's all well and good to show the winning move, and the technical better risk reward, but if the risk ends up being higher because the worst case scenario happens...you've still lost more. A suggestion for SMB in these videos, please show the other side of these trades instead of the win all the time. i.e the worst case scenario. Capital preservation should be no1 for new traders. Especially if you're trading by selling spreads at earnings...
Michael, I agree that you can't just slap this trade on any underlying. You need to study the stocks which have a tendency to have overly inflated expected moves built into the time premium. There are tools for this.
@@sethfreudberg4750 Thank you for that response, I was actually planning to conduct research and locate these winner goodies {low volatility for the crush and high volatility for buying long strangles}. You had mentioned there are tools to filter these winners. Could you list a few by any chance? :) interested and much appreciated
I agreed. This is a stupid "strategy" there is no strategy it was all luck. If you look at any stock esp tech stock they have high Iv but the can move +- 10% at earning. so you will guaranteed to get max loss every other trade. When was the last time any tech stock was flat after earning.
Training company or legit prop trading desk...? SMB goes by “SMB U, LLC” I would assume the “U” implies “university”. Once again, tech has wiped out the need for old school prop trading.
Amy I think you misunderstood, the broker requires the capital (margin) for the trade, not SMB. I've attended SMB's portfolio management training course and it is due to the course that I am now profitable. So suggest you refrain from the accusations.
@@nathanshane6849 Well it depends on how you trade it, Nathan. There are "strategy adjustments" that can be applied to a trade, but typically earnings strategies don't use adjustments if traded through earnings so in that sense you are right.
How would a long straddle be better in this case where you are trying to profit from the vol crush a few hours after the trade was put on? Your long trade would be a looser unless there was a major move, which isn't the norm ..... but vol crush is the norm.
I don’t like this trade at all. This only makes sense if the stock barely moves. If this had a decent run up or sell off he would have lost money. Too risky for me.
All these guys are trying to do is sell you courses they give you just enough information to get interested and not enough to do anything else all they're trying to do is sell horses that don't work.
