Volatility Buying
This same earnings event could have been played entirely differently. A
different trader, Bobby Buyer, studied the same volatility chart as Susie. It
is shown again here as Exhibit 12.7 . Bobby also thought there would be a
rush and crush of IV, but he decided to take a different approach.
EXHIBIT 12.7 Chip stock volatility before and after earnings reports.
Source : Chart courtesy of iVolatility.com
About an hour before the close of business on July 21, just three days
before earnings announcements, Bobby saw that he could buy volatility at
30 percent. In Bobby’s opinion, volatility seemed cheap with earnings so
close. He believed that IV could rise at least five points over the next three
days. Note that we have the benefit of 20/20 hindsight in the example.
Near the end of the trading day, the stock was at $49.70. Bobby bought 20
33-day 50-strike calls at 1.75 (30 volatility) and sold short 1,000 shares of
the underlying stock at $49.70 to become delta neutral. Exhibit 12.8 shows
Bobby’s position.