Buying Premium Prior To Earnings - Does It Work?

I had a great respect for Sosnoff.. after seeing some of his "studies", he completely lost my respect.

This study was severely flawed.  Every trade was hurt by negative gamma, the opposite of one of the strategy's benefits.  Sosnoff needs to stick with interviewing Karen the SuperTrader.

Another reason to always review & question research methodology (in any field). Like you say, the devil is in the details and even small details can make huge differences.

The study doesn't make sense, unless I am not understanding it correctly. If you buys a 200 strike straddle when the stock is at 220, then you are long deltas, by a lot. So of course they will have losses when the stock moves down to 200. Sounds like they are setting up a straddle to lose on deltas every time. Is that really what they did in the study? That would defeat the entire purpose, which is to analyze if the IV rise leading up to earnings can be traded profitably, and that must be analyzed using a strategy that is initially delta neutral. And they used only a small sample size of high priced stocks, which also tend to have low gamma, so they are better candidates for calendar spreads. 

ha as you say by picking the strike that they know is atm on the day before earning the pick the straddle which they know will have NO gamma gains. So even if the stock moved 20% over the 2 weeks they hold the straddle (which would give you a massive profit on you straddle!) they are picking the one that will lose in that scenario. I'm not sure whether that's ignorance or whether they wanted to manipulate the outcome of they 'study' (not sure why you would - so I'm going with ignorance)

jgoptions, watch the segment (link at the top of the article) and see for yourself.

Marco, not only it will have no gamma gains, but it will most certainly have gamma losses.

Honestly, I was shocked after watching it. As I mentioned in the article, it's like they selected the worst possible parameters in terms of strike, timing and stocks. Ignorance or manipulation? You decide. For me, it's hard to believe that Sosnoff doesn't know how to set up a straddle properly.

Yes, I did watch the segment, and I am shocked as well, so much so that I questioned if I was understanding it correctly. It's hard for me to believe that they would set up such a flawed study, but it looks like that's the case here.

I really have no good explanation. I actually contacted them with those questions but got no response. I would be curious if they respond to someone else contacting them.

I have listened to Tasty Trade, and everyone else. I am a scientist and try to remain objective. So what does this study tell me. My conclusion is its not what you do, it's how you do it. This is the problem with options and stocks, everybody thinks there is one secrete way. The secrete is understanding the why something happened a certain way. So far I have enjoyed Kim, and SO as I think he and SO has a very good handle on the why things happen a certain way. Remember when everyone thought the world was flat and they could not have been more wrong. That's why we need a leader like Kim, that has been there done that. We can learn from him and continue to learn with him. I am here because iron condors work great until they don't. So I have more to learn.

Thank you for your kind words.

I wrote an article a while ago on Seeking Alpha where I argued that there is more than one way to trade options. Here is the link - http://seekingalpha.com/article/396701-myths-and-misconceptions-of-options-trading

I never claimed and never will that my way is the only way. Whoever claims such a thing is a fool. Who am I to say that I'm the only one who is right? There are so many smart traders out there. What I do works for me, it works for many of our members, but it definitely doesn't work for everyone.

What I tried to show in this article is few flaws in the way tasty trade conducted the study.

btw, I contacted them but got no answer. I also commented on the YouTube segment and Facebook, but my comments have been removed. I guess they are not ready to deal with my arguments. It's their prerogative of course.  

This is our track record after this "study" has been aired:

XOM straddle 1.6%

EXPE straddle 16.6%

WYNN straddle 4.1%

SBUX straddle 2.7%

QCOM straddle 11.8%

MSFT straddle 35.4%

Isn't it ironic? Will someone tell Sosnoff?

Kim, someone has to be on the other side of our trades.

Kim, someone has to be on the other side of our trades.

That's true.. and since tastytrade has "slightly" higher following than SteadyOptions, maybe this article was a good thing for us. No wonder we are having such a good streak.

They curve their studies and they block those who disagree (me) on twitter.  And they call names on air (me).  I talked to some of their research team, they don't have enough brain power or integrity (they can choose) to do the study right.

They have a caller segment at 10am CST if you want to dispute the study live over the phone.

Got a response from tastytrade:

"we'd like to request that you please remove any tastytrade images and/or materials from your site."

Not exactly what I expected. Instead of commenting on the article, all they care about was their images. 

There are two things that I hate the most: lies and hypocrisy.

The criticisms in this post are based on a complete misunderstanding of the study in question.  The point was to test whether a strategy designed to take advantage of the run up of IV prior to an earnings announcement could be profitable.  The strategy they employed was designed to a) have as high a positive vega as possible and b) end in the position where that vega would maximize the benefit of increasing implied volatility.  In both cases, a long straddle that is closed with the underlying exactly at the strike fits the bill perfectly.

By misinterpreting their use of a long straddle as an attempt to profit from a move away from the strike price, you turn the study on its head.  The way it's designed, if the underlying moves away from the strike as earnings approach, the benefit of positive vega is lost.  Since such benefit is the goal in this study, it would make no sense to use a strategy which by its very nature would defeat the benefit it was testing for.

Simply put, the study was testing the concept of a pure volatility play.  Since vega is strongest at the strike price of a straddle, it was necessary to craft a study in which the underlying was at exactly that point when the trade was closed.  The fact that such trades were ultimately unprofitable clearly shows that their conclusions are quite valid.

It is always advisable to properly understand a piece of research before judging the quality of the outcome.

I believe it was YOU who completely misunderstood how the study was skewed to reach the conclusion they wanted.

When you do a straddle, you can profit from two things: vega and gamma. Both are important factors, and both can contribute to straddle profitability. When you start a straddle with say 100 strike when the stock is at 100, and the stock moves to say 110, you have a very good chance to be profitable because gamma works for you. However, if the stock is at 100, you start with 110 straddle and the stock moved to 110, your chances of profitability are slim to none.  When you buy a straddle, you want the stock to move away from your strike, not towards the strike. You LOSE the maximum amount of money if the stock moves to the strike.

Their study was not " an attempt to profit from a move away from the strike price". Exactly the opposite: they tried to profit from a move towards the strike price. By doing the study this way, they dramatically reduced the chances of the straddle to be profitable.

The segment has been removed from tastytrade website, which shows that they realized how absurd it was. .

We will let tastytrade to do their "studies" while we are making money with real trading not studies. We traded 18 straddles in 2016 with winning ratio of 72%. In 2017 we already closed 4 out of 4 winners. We do it by implementing the strategy the way it should be implemented (choice of stocks, entering at right prices etc.) In fact, we are very grateful to tastytrade followers for providing us a fresh supply of sellers for our straddles.

Kim, can you please explain how you came about the following example to explain how TT did their testing? Is it your example, or it is TT's?

"In the previous cycle, TSLA was trading around $219 2 weeks before earnings. The stock closed around $201 a day before earnings. According to tastytrade methodology, they would buy the 200 straddle 2 weeks before earnings. They claim that this is the best case scenario for buying pre-earnings straddles."

On 23/07/2014 at 4:28 PM, jgoptions said:

The study doesn't make sense, unless I am not understanding it correctly. If you buys a 200 strike straddle when the stock is at 220, then you are long deltas, by a lot. So of course they will have losses when the stock moves down to 200. Sounds like they are setting up a straddle to lose on deltas every time. Is that really what they did in the study? That would defeat the entire purpose, which is to analyze if the IV rise leading up to earnings can be traded profitably, and that must be analyzed using a strategy that is initially delta neutral. And they used only a small sample size of high priced stocks, which also tend to have low gamma, so they are better candidates for calendar spreads. 

If you read the slide carefully, during the testing, they purchased the ATM straddle 14 days prior to earnings. The example on TSLA (don't know if it is extracted from TT or it was from Kim) illustrates this wrongly. And, that example on TSLA has got this whole conversation going in the wrong direction. 

1 hour ago, Guest Angelo Palai said:

Kim, can you please explain how you came about the following example to explain how TT did their testing? Is it your example, or it is TT's?

"In the previous cycle, TSLA was trading around $219 2 weeks before earnings. The stock closed around $201 a day before earnings. According to tastytrade methodology, they would buy the 200 straddle 2 weeks before earnings. They claim that this is the best case scenario for buying pre-earnings straddles."

TSLA was part of their study. I used TSLA example from the previous study to illustrate the study methodology. 

1 hour ago, Guest Angelo Palai said:

If you read the slide carefully, during the testing, they purchased the ATM straddle 14 days prior to earnings. The example on TSLA (don't know if it is extracted from TT or it was from Kim) illustrates this wrongly. And, that example on TSLA has got this whole conversation going in the wrong direction. 

They did not purchase ATM straddle. They purchased FUTURE ATM straddle, using strike recorded prior to earnings, not strike at the time of the trade setup. Please watch the segment again.

I got it wrong. Sorry Kim. I totally missed out the word "future". 

I'm glad you can see it now. Most TT fanboys still think we are bashing TT for no reason.