For the last two weeks I decided to paint my house myself. Armed with 50 gallons of paint and a 45 foot articulating boom lift I set to the task. Last Friday, an alert hit my phone. There was some chatter on the Predicting Alpha (huge shout out, and their terminal will be featured through the post) discord in regards to a misplaced earnings move. Regardless, I looked quickly and saw a very small implied move on a volatile stock. I used a thinkorswim mobile did a trade for a 1 lot straddle. The next morning, while sipping some coffee and waiting for some errant rain showers to stop, I sold my straddle for a 105% return.
What Happened?
Markets are supposed to be efficient. They don’t price things poorly, and if they did everyone would be rich, or no one would participate. In any event, I’ve tried to find an answer on why this was priced so poorly. The only thing I can come up with is that the past two earnings implied moves were over 11% and the move was never over 9%. But let’s move on to how we discovered this in the first place, and how we might be able to find more.
How We Got Here
When looking for earnings to trade, there is a chance that volatility is not priced correctly. There are several reasons for this, but it’s not relevant for this post, nor is every reason even known to me. But in the Predicting Alpha terminal there’s a scanner that gives us a general “Implied move vs Average Move” which helps to narrow down searches. In the case of SNAP, it stood out immediately, the screenshot below shows a implied move of 9 and an average of 17. Thats a huge difference.
Just to be sure, I checked the straddle price as well in thinkorswim, it also showed a 9% implied move with a $6 straddle price.
To quantify this, I decided to figure how many standard deviations away this move was. I’ll share that short snippet with you as well. Use it how you see fit. Here’s the link to the google colab.
The move was 2.8 standard deviations below the mean. In any event. Here’s the chart after the earnings call:
And then later on in the day after earnings:
And here is what a position put on ThinkBack looks like the day after earnings:
And that was my adventure of trading on top of a 45 foot lift. I hope you’ve enjoyed it.
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