I posted a note on MAR and earnings vol with order flow on 10-5-2010 (i.e. two days ago). You can read the article here:
Marriott (MAR) - One-Sided Trades into Earnings Push Vol
In that article on the 5th I noted that the order flow was buying vol in the front month into earnings. we also noted that earnings vol in general seemed relatively fair in MAR in prior cycles as no clear cut front or back spread strategy proved consistently profitable.
The trades we took a look at were:
1. Buy the Oct 38 calls like the order flow.
2. Buy the Oct 37/38 strangle for $1.55.
3. Do #2 above, but also sell the Oct 35/40 strangle @ $0.45 netting a net debit of $1.15. Of all the trades, I like this type the best, naked purchases are a bit too risky for earnings vol for me.
4. Alternatively, go opposite the order flow, sell some vol in straddles or strangles. Risky of course, especially in the face of vol buying.
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Let's look to the Options Tab now (below).
So #1 and the contrarian #4 were losers. The order flow was pretty clearly vol bying as I mentioned in the article - without an obvious delta bias. As I wrote: "The call buying yesterday may be a delta bet or it could be straight vol, as the buyer may have sold stock against the calls to turn them into puts or straddles."
If it was a straight vol purchase, then it was a winner. Trades #2 and #3 worke like this:
2. The strangle bought for $1.55 is now worth ~$1.875, so a 21% gain in 2 days.
3. The condor (ish) bought for $1.15 is now worth ~$1.25, for a smaller 9% gain, though if MAR sits, those 35 puts will go down.
This is trade analysis, not a recommendation.
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