While the popular view is to buy the straddle a few weeks before earnings, you have to take into account the time decay leading up to it. Sure you buy low IV, but when the stock does a non-move, and IV comes back to levels which you bought at, don't forget time has passed since then. Unless IV spikes hard before earnings and in the same month your straddles in, directionally the market has priced the straddle correctly most of the time.
Earnings Plays?
- Thread starter tj1320
- Start date
Here is a longer term thought. This is just a thought so please don't criticize me for it. What about finding stocks that have high volatility and buying a call and put on it 3 or 4 months out? I've seen some charts the past couple days that show stocks moving substantially in either direction every 4-8 weeks from the current price at any given time during the timeframe on the chart. What about ACL 2 earnings ago? Sure, it moved quite a bit right after earnings but it also moved from around 120 to 150 during the next 6 weeks.
You have noticed a pattern, in both cases ACL trended up after earnings. I would recommend buying ATM CALLS a day or two AFTER earnings, IV will have dropped and you can ride the wave back up.
I don't think a straddle before earnings will produce a profit in your example, any profit you do make will not be worth the risk of a smaller move.
Ok, it's tricky buying a staddle/strangle 2 or so weeks before earnings. First volatility will drop right after the announcement and if the underlying doesn't move enough to cover the iv drop then you'll loose. Second, time decays - this can be somewhat offset by buying longer dated straddles/strangles, say 3 months out. However, the biggest killer is falling vol combined with potentially no (or not enough) price movement. However you can always close your long straddle on the day prior to earnings if vol has gone up enough to give you a profit.
Daddy's boy
Daddy's boy
I have always tried to steer clear of entering or holding options through an earnings announcement. BUT, lately I've tried a few strategies and I'm 50%.
I did a a bull put spread on CECO and exited with a $700 profit and did a straddle on RIMM and exited with a $600 loss. These were 3-4 day holds.
I am in QCOM and held my long call through earnings last week to see what would happen and I'm about $150 in the hole as of Friday but the buyers started to come back late in the day and I have lots of room to let it play out.
Here's my question - when should I choose a straddle over a strangle? I've heard that you can do better with a strangle than a straddle on a volatile movement after an announcement BUT I think that in order for a straddle to be profitable you need about an 8% movement in the stock. 8% seems like a big move to me. Am I really looking for an even bigger move if I put on a strangle?
I did a a bull put spread on CECO and exited with a $700 profit and did a straddle on RIMM and exited with a $600 loss. These were 3-4 day holds.
I am in QCOM and held my long call through earnings last week to see what would happen and I'm about $150 in the hole as of Friday but the buyers started to come back late in the day and I have lots of room to let it play out.
Here's my question - when should I choose a straddle over a strangle? I've heard that you can do better with a strangle than a straddle on a volatile movement after an announcement BUT I think that in order for a straddle to be profitable you need about an 8% movement in the stock. 8% seems like a big move to me. Am I really looking for an even bigger move if I put on a strangle?
yes - generally the strangle is cheaper but often requires a bigger move in the underlying, simply look at the risk graph and you'll find it's self explanatory. It all depends on your cost on opening the trade, i.e. your initial debit, which in turn determines your breakevens.
daddy's boy
daddy's boy
Ok - I'm going in again. This time long in LMT on earnings tomorrow. June 70's...all my indicators point to a few bucks on this one. We'll see.
In English?
