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The Earnings Ratio Condor

Just as it is common for at-the-money implied volatility to rise leading up into an earnings announcement (as discussed in The Earnings Straddle in Different Flavors), it is also common for the curvature of the volatility skew to become more pronounced.  This latter phenomenon is perhaps less common than the former and is certainly more difficult to identify (and to trade, for that matter), but that is not to say that it doesn’t exist and can't be exploited.

Allow to me to explain with an illustration.  Below is a mockup of the vertical skew of a typical big name stock going into earnings.

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Trading Vertical Spreads as Unbalanced Condors

Over the last month and half, technical signals have proven to be false or extremely short lived.  So how do you trade the traditional, conservatively positioned vertical spread when the broad market indices are in a craze?

The first question you have to ask yourself is, “Does it makes sense to be trading these positions at all right now?”  The truth is, while the Option Workshop focuses on vertical spreads, the trade makes more sense in some environments than others.

But right now is in fact, a good time for verticals.  Since implied volatility is high (both in the at-the-money and out-of-the-money strikes), vertical spreads can generally be positioned at top dollar and/ or further away from price than normal.  On the other hand, volatility is high for a reason – price is moving around a lot.  A trade positioned well out-of-the-money today, may find itself at-the-money three days from now.

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Three Dimensions of Vertical Spreads, Episode 2

The Multi-Dimensionality of Time

As promised, here is the second video in our series on Vertical Spreads that I recorded with AJ Brown.  Like the first episode, the video below is a slightly different edit of the one that AJ released last Thursday.  Some of the feedback I received on the first episode was that the full screen resolution was poor.  This episode is in full HD and so should be clear. We begin this episode with the premise that Vertical Spreads profit or lose in three ways:

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