Interview, Fireside Chat
Trading Earnings Volatility with Options · Erik Smolinski
- Market volatility is projected to remain elevated throughout 2025, with the VIX staying above 20 against a historical average of 14 to 16, driven by unpredictable news events and tariff announcements.
- Compound annual growth rates are expected to normalize to a range of 22 to 24 percent once statistical outliers from 2023 and 2024 are removed.
- Trading models and strategies require continuous refinement to adapt to shifting market regimes, such as the transition from growth stocks outperforming large caps in 2019 to 2020.
- The introduction of daily SPX expirations on May 16, 2022, is anticipated to become a significant component of trading books, necessitating adjustments to overall approaches.
- Earnings-based strategies utilizing implied volatility (IV) expansion are expected to ramp up approximately two weeks prior to releases, with positions intended to be closed if IV fails to expand steadily.
- Earnings trading strategies are planned to operate in three distinct modes: pre-run-up IV expansion, post-release IV contraction via short straddles or strangles, and post-earnings announcement directional drift.
- Zero Days to Expiration (DTE) strategies are noted for high gamma sensitivity and require robust data sets to prevent traders from deviating from established scripts.
- Automating trading execution is expected to introduce excessive variance requiring manual intervention, particularly for managing model violations, unlike the latency-driven automation used by institutions.
- AI is predicted to become a defining feature of future trading, offering transformative potential for data analysis and statistical filtering comparable to the advent of the internet.
- Development of proprietary backtesting and trade log analysis tools faces risks of significant scope creep and extended completion timelines.
- Risk modeling must account for historical maximum moves rather than expected moves, acknowledging that the worst portfolio performance day remains unpredictable and always lies ahead.
- Market reactions to unpredictable events, such as sudden tariff announcements, are expected to level the playing field by flattening institutional advantages.
- Retail traders lacking paper trading or extensive data collection may lack the confidence to execute strategies or identify normal market behavior.
- Trading strategies involving small accounts (e.g., $2,000 to $5,000) aiming for rapid growth into millions are predicted to result in failure.
- Utilizing prop firms may erode the benefits of self-direction by introducing stakeholders, though they could serve as a forcing function for discipline.
- Institutions leveraging AI and automation operate in a latency world inaccessible to retail traders, limiting the utility of similar automation for retail performance.