Best way to trade options...

[cashmoney69]

For earnings (one week before, or day of release)

Ive been focused on straddles because they're easy, or so it

seems, but what option plays do more experienced traders than

myself put on, but also not too hard for a beginner to learn?

Thanks

 

[El OchoCinco]

Remember that just before earnings many stocks might have inflated IVs which means you are buying relatively expensive options prior to earnings release. This means a larger move might be required for you to profit on your position. Also, after earnings release you have to deal with the IV collapse that can often occur shrinking out a lot of your premiums.

 

[stevegee58]

Caveat: I'm not saying I trade this for a living or anything, but I'm experimenting with it and it's interesting.

I've been paper trading short calendars as an alternative to straddles. In a normal (long) calendar, you sell the front month and buy the back month, same strike. In a short calendar, you do the opposite; buy the front month and sell the back month.

If you look at a risk graph for this, it looks very much like a straddle. However, it has a major advantage over the straddle: when IV collapses after an earnings report you can actually make money. With a straddle, you lose money unless the stock makes a big move. Usually you get out of a long straddle before earnings because the IV has priced in the expected move. With a short calendar, you can hold it over the announcement.

The main risk is that you're technically holding a naked short because the long front month expires first. It's not a problem as long as you're there to roll the long option to the next month to stay hedged.

 

[nazzdack]

Quote from cashmoney69

I've been focused on straddles because they're easy........

1) Buying straddles/strangles in the days and weeks leading up to major news announcements has merit. The expected uptick in implied volatility levels benefits the "longs".
2) Short-selling the same position immediately before major news announcements and holding it through will benefit from the expected implied volatility collapse......as long as the market doesn't move too far away afterwards.
3) Start out on a small-scale to get comfortable with the position and to become more familiar with the behavior of the premiums before and after the "event" that everyone is focused on.

 

[c.chugani]

Quote from stevegee58:

Caveat: I'm not saying I trade this for a living or anything, but I'm experimenting with it and it's interesting.

I've been paper trading short calendars as an alternative to straddles. In a normal (long) calendar, you sell the front month and buy the back month, same strike. In a short calendar, you do the opposite; buy the front month and sell the back month.

If you look at a risk graph for this, it looks very much like a straddle. However, it has a major advantage over the straddle: when IV collapses after an earnings report you can actually make money. With a straddle, you lose money unless the stock makes a big move. Usually you get out of a long straddle before earnings because the IV has priced in the expected move. With a short calendar, you can hold it over the announcement.

The main risk is that you're technically holding a naked short because the long front month expires first. It's not a problem as long as you're there to roll the long option to the next month to stay hedged.

Regarding your example of the short calendar around earnings report:

I guess the earnings should be in the back month (since you are selling the higher premium which has been priced in) and buying the cheaper front month.

If it were the other way (ie. earnings in the front month) you would be buying high IV and selling the back month with low IV (since after the report the IV would come down again), putting the odds against you.

Is this reasoning correct?