In this blog we discuss how we found which option side to lean into prior to Twitter’s (NASDAQ:TWTR) earnings release the following day – 10/27/2015.
It never amazes me when the predictable is always the unpredictable when it comes to trading options around earnings. The “zero sum” outcome and randomness of the efficient market indicators are equally reliable to be unreliable. What goes down must come up.
And paradoxically, TWTR posted a plus in earnings, though minuscule by our standards, market makers obviously have inventory lined up to short TWTR, proving that our PUT weighed values were correct: but only momentarily since TWTR returned to the breakout price on during intraday trading on 10/28.
Posted Table on October 26, 2015 the day before Twitter posted earnings.
Estimate is -0.24 cents and actual was 0.10 in After Market Reporting. What transpired as to the volatility of movement provides excellent feedback as to why you’re flying blind, even with statistical evidence to support a “mechanical” risk defined trade.
In this table below you’ll see our goal post statistical data indicator’s comparison between the NOV 2015 Call/Put analytic matrix that is calculated by our Codex.qbt* formula.
How to read this graph: On both left and right sides we have Call and Put coinciding indicators: Premium (Ask), our entry price (calculated for a limit order entry), Bio premium price, Delta Hedge (not direct Delta, but our own calibration), Gamma, Implied Volatility at the Strike, Probability Out-of-the-Money, Strike, Number of contracts in hundredths, Probability of Profit (calibrated to our own formulary), P/L, and Skew price. Note: Intrinsic is purposely left blank as this is a short term trade.
In the middle are the Logic signals: Delta Hedge shows “Call” and Implied Volatility shows “Put”, a contradiction that played out accordingly. The “Spread .03” Alert is to signal us when the spread between the Bid and Ask expands greater than two cents.
Stock quote and option quote for TWTR on 10/26/15 08:13:03 CALL P/L Strangle PUT P/L $38.00 $260.00 $222.00 NOV 15 (25) 100 CALL OFFSET** PUT Premium 1.98 $260.00 Premium 2.060 Entry Price 1.78 DELTA Entry Price 1.931 Bid Price 1.93 PUT Bid Price 2.07 Delta Hedge 0.3381 Delta Hedge 0.427 Gamma 0.0887 IV Gamma 0.1272 IV 0.743 PUT IV 0.760 Prob OTM 0.61 Prob OTM 0.52 Intrinsic Spread > .03 Intrinsic Strike 32.00 CALL Strike 30.00 Contracts 100.00 ALERT Contracts 300.000 Prob of Profit 0.1921 PUT Prob of Profit 0.1935 Profit/Loss $38.00 ALERT Profit/Loss $222.000 Skew Price 1.94 Skew Price 2.209
What sticks out is that the Implied Volatility is .743, well above our .45 threshold for mean reversion of a Buy Call signal; and that the Put indicators out weigh the Calls.
With a favorable out come of TWTR going short, we executed a cost reduction limit order with 3 Long Put contracts and 1 Long Call contract, to protect the upside, so not to diminish our profits. You’ll notice we were pretty close in matching up the premiums for pairwise management of risk to reward ratios.
TOS “think back chart” (The outcomes are not as accurate given the intraday subtleties involved in our trade executions.)
The totals are listed in the above graph: Call profit was $38 on one contract and Put profit was $222 giving us a $260 pay out minus the per contract fees. The whipsaw volatility on price formation was foretold by the OTM percentage.
*Codex.qbt is our bootstrapped Excel quantitative statistical model name.
It is in the Proof of Concept phase; based on the hypothetical Qubit “superposition” of categorical data inputs compiled into statistical data bins then calibrated for a “measure of certainty” outcome.
**Offset is the combined profit/loss between the Call and Put positions. This is an excellent visual for “Strangles” and “Straddles” as you can see how both positions can become profitable at the same time.
Do you use TOS? Would you like to have our Open Source Excel spreadsheet models for your own use?
Available for MSN Excel 2010, Apache Open Office and Google Spreadsheets. These spreadsheets can be customized for your own trading style and watch list selections.
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Disclaimer: The above information is for educational purposes only. We make no claims of validity or suggestion for trading the assets listed.