How much can I reasonably make if I buy a long straddle just as soon as earnings release day is announced and ride the rise in implied volatility along with any movements till the earnings release date just before earnings is released?

If I do this without waiting for the gap up or down from the release, will I make just as or a similar amount of money compared to waiting for the gap up down due to the earnings release?

Will it not work because a long straddle is short theta? What other alternatives are there.

Thanks a lot.

  • 1
    $\begingroup$ The flaw here is that you are not the only one who knows the earnings release date is coming. The options are priced by market makers taking into account predictable volatility boosting events such as earnings releases. $\endgroup$ – noob2 Jul 13 '20 at 0:15
  • $\begingroup$ I've seen guys wiped out either on the long or short Gamma side (the first over time and the second instantly), so you shall be smarter than this. $\endgroup$ – Lisa Ann Jul 13 '20 at 17:19

The exact date of the earnings announcement (EA) is not relevant to your strategy because everyone knows that under normal circumstances, earnings dates are about 3 months apart.

There are several moving parts in your long straddle strategy.

For higher beta stocks that tend to experience EA price moves, the implied volatility (IV) starts increasing 4-6 weeks before the earnings announcement. It's gradual. So that means that you're going to fight two sided time decay for a long time. It's possible that you could have a 50% or more increase in IV in a month and lose money.

If you buy your straddle closer to expiration, IV has already increased somewhat so you're paying up for the straddle but with the same issues. What time frame to buy depends on the rate of IV ascent and when it occurs in the 4-6 week period.

With an ATM straddle, the delta of each leg is approximately 50 so you're not going to gain much for modest moves in either direction because one side loses a decent amount of what the other side gains.

The short answer is that it is possible to make money with this strategy before the EA but in order to do so, the increase in IV and/or the change underlying price are going to have to be enough to overcome the theta decay. Possible but not a given.

AFAIC, holding a straddle through the EA announcement is generally not a good idea because the post EA IV contraction is a killer as premium collapses.

My general suggestion would be to look at ways to sell inflated near expiration premium and buy cheaper further expiration premium so that you capitalize on the IV collapse. Roll down hill rather thanswim upstream :->)


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