Directional trades prior to earnings

oldmonk said:
maybe my question wasn't clear enough. i'm not asking how to make directional trades. it's a question about long option plays prior to earnings.
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Your OP appears to be straddles/strangles versus long calls before earnings.

My reply is to go with long calls only - or puts. You can exit before earnings or after.
 
oldmonk said:
Buying straddles before earnings is a well known non-directional trade that seeks to benefit from increasing IV and/or a move in either direction. My backtests (using just stock prices) show that many stocks (especially tech) tend to drift up prior to earnings.

Also, it's possible that the stock has a directional move upwards that's not large enough to cover the cost of a straddle. This would not be an issue when you just have a call. So is it a better play to simply buy ATM or slightly OTM calls a few days prior to earnings and close them just before the earnings release?
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This company has an option backtesting that has studies for this type of question.
https://tm2.cmlviz.com/login.php

Bob
 
oldmonk said:
Buying straddles before earnings is a well known non-directional trade that seeks to benefit from increasing IV and/or a move in either direction. My backtests (using just stock prices) show that many stocks (especially tech) tend to drift up prior to earnings.

Also, it's possible that the stock has a directional move upwards that's not large enough to cover the cost of a straddle. This would not be an issue when you just have a call. So is it a better play to simply buy ATM or slightly OTM calls a few days prior to earnings and close them just before the earnings release?
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This is just an opinion and not a fact:

In general, the option market is quite efficient, so if you do not have knowledge and just randomly buy/sell straddles/strangles or call/put you will not profit.

Why do I have this opinion? I forward tested this (buying straddle/strangle and call/put prior to events) with small positions (unfortunately not statistically significant samples) and netted nothing to speak of. Intuitively, think about this: Straddle/strangle cover movements to both sides but you pay twice the premium, call/put cover only one side so you will be wrong half the time. The net result should be about the same unless I know beforehand which side it will go. Market makers, institution traders are not stupid and won't willingly hand money over to me, a small mom and pop retail trader without a fight.

If you are a small mom and pop like me and want to play this game, perhaps it is better to play after earning? o_O Anyone with opinion on this is welcome to comment.

Thanks in advance.
 
Robert Morse said:
Are you saying that is high or low to help you make money or avoid a bad trade?
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Why is it when people see $1500 is huge sum and when your profitable it is a fixed cost of Trading? Maybe they only at first they believe in hope and dreams?

I keep an education acct every year and put same amount so when there something interesting I don't think bout it. And am not picking on other anyone's post, just an opinion.
 
When playing earnings (buy puts only), these are some indicators I use. Its not a bread and butter way to go, because finding setups can be tough.

P/B, P/S or P/E is bloated (2 out of 3 big time)
earnings history shows >5% move (either way in the past 2 or 3 reports)
heavily traded (got to be liquid for an easy exit)

Works best with lower end of mid caps or higher end of small caps (<2B). Be careful around the big stuff (unless you have very deep pockets)

And with puts, the IV is more favorable when a stock heads south. So if IV collapses after the announcement, its only for a very short time. The opposite is true for a call on a stock heading north.

All the above is IMHO only.:D
 
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