SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Can We Profit From Volatility Expansion Into Earnings?


In one of my previous articles I described a study done by tastytrade, claiming that buying premium before earnings does not work. The title of the study was "We Put The Nail In The Coffin On "Buying Premium Prior To Earnings".

I demonstrated that their study was highly flawed, for several reasons (strikes selection, stocks selection, timing etc.)

It seems that they did now another study, claiming to get similar results.

The study was done today - here is the link. The parameters of the study:

  1. Use AAPL and GMCR as underlying.
  2. Buy a ATM straddle option 20 days before earnings.
  3. Sell it just before the announcement.

The results of the study, based on 48 cycles (2009-2014)

  • AAPL P/L: -$2933
  • GMCR P/L: -$2070

Based on those results, they declared (once again) that buying a straddle before earnings is a losing strategy.

 

What's wrong with this study?

  1. Dismissing the whole strategy based on two stocks is completely wrong. You could say that this strategy does not work for those two stocks. This would be a correct statement. Indeed, we do not use those two stocks for our straddles strategy.
  2. From our experience, entering 20 days before earnings is usually not the best time. On average, the ideal time to enter is around 5-10 days before earnings. This when the stocks experience the largest IV spike. But it is also different from stock to stock.
  3. The study does not account for gamma scalping. Which means that if the stock moves, you can adjust the strikes of the straddle or buy/sell stock against it. Many times the stock would move back and forward from the strike, allowing you to adjust several times. In addition, the study is probably based on end of day prices, and from our experience, the end of day price on the last day is usually near the day lows, and you have a chance to sell at higher prices earlier.
  4. The study completely ignores the straddle prices. We always look at prices before entering and compare them to previous cycles.

Entering the right stocks at the right time at the right prices is what gives this strategy an edge. Not selecting random stocks, random timing and ignoring the prices.

 

half truth.jpg

 

As a side note, presenting the results as dollar P/L on one contract trade is meaningless. GMCR is trading around $150 today, and pre-earnings straddle options cost is around $1,500. In 2009, the stock was around $30, and pre-earnings straddle cost was around $500. Would you agree that 10% gain (or loss) on $1,500 trade is different than 10% gain (or loss) on $500 trade? The only thing that matters is percentage P/L, not dollar P/L.

 

Presenting dollar P/L could potentially severely skew the study. For example, what if most of the winners were when the stock was at $30-50 but most of the losers when the stock was around $100-150?

 

Tom Sosnoff and Tony Battista conclude the "study" by saying that "if anybody tells you that you should be buying volatility into earnings, they really haven't done their homework. It really doesn't work".

 

At SteadyOptions, buying pre-earnings straddle options is one of our key strategies. Check out our performance page for full results. As you can see from our results, the strategy works very well for us. We don't do studies, we do live trading, and our results are based on hundreds real trades.

 

Of course the devil is in the details. There are many moving parts to this strategy:

  • When to enter?
  • Which stocks to use?
  • How to manage the position?
  • When to take profits?

And much more.

 

So we will let tastytrade to do their "studies", and we will continue trading the strategy and make money from it. After all, as one of our members said, someone has to be on the other side of our trades. Actually, I would like to thank tastytrade for continuing providing us fresh supply of sellers for our strategy!

 

If you want to learn more how to use it (and many other profitable strategies):

 

Start Your Free Trial

 

Related Articles:

How We Trade Straddle Option Strategy
Long Straddle: A Guaranteed Win?
Why We Sell Our Straddles Before Earnings
Long Straddle: A Guaranteed Win?
How We Made 23% On QIHU Straddle In 4 Hours

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Bullish Short Strangles

    A bullish short strangle sounds like a complicated strategy, but it’s really quite simple for those familiar with option terminology. A short put is combined with a short call to where the position starts with some amount of positive delta overall. This distinguishes itself from a delta neutral strangle, where both the short put and short call are sold at the same delta.

    By Jesse,

    • 0 comments
    • 41 views
  • Eight Mistakes Every Forex Trader Should Avoid

    The forex market is currently the largest financial market in the world and, due to its highly liquid nature and low barriers to entry, is only expected to grow. Becoming a forex trader requires minimal effort and with a decent internet connection, a laptop or computer, and some spare money to invest, you can start in no time.

    By Kim,

    • 0 comments
    • 35 views
  • Put/Call Parity - Two Definitions

    Put/call parity is a term options traders use to mean one of two things. The simplest definition and the one most applicable to most options traders compares the similarity in the bid/ask spread and the net debit or credit resulting from this.

    By Michael C. Thomsett,

    • 0 comments
    • 227 views
  • Put Selling: Strike Selection Considerations

    When selling puts, such as we do in our Steady Momentum PutWrite strategy, there are many questions a trader must answer: What expiration should I use? What strike should I sell? Should I choose that strike based on delta or percentage out of the money?

    By Jesse,

    • 0 comments
    • 260 views
  • What Can We Learn From UBS YES Lawsuit?

    News followers may have seen the recent stories on UBS being sued by its clients and investors who participated in UBS’s “Yield Enhancement Strategy (YES).”  Evidently, numerous UBS clients signed up to participate in an iron condor strategy that lost a lot of money.They’re angry, and they’re filing a lawsuit.

    By cwelsh,

    • 2 comments
    • 863 views
  • Pinning Down the ‘Option Pinning’

    What many people on SO have in common is that they have read the books of Jeff Augen on options trading. Although written a decade ago they continue to be an interesting source of strategies for the retail investor. Retail investors have particular constraints that make most of the broad theoretical musings on options rather moot.

    By TrustyJules,

    • 0 comments
    • 367 views
  • Holding Positions into Expiration

    "Every once in a while you must go to cash, take a break, take a vacation. Don't try to play the market all the time. It can't be done, too tough on the emotions." - Jesse Livermore

    By Mark Wolfinger,

    • 0 comments
    • 294 views
  • Tales Of How Big Trades Went Wrong

    One way to learn from your past mistakes is having to go through the painful and challenging experience of explaining them. Another way is to listen to others who might have lived through some disgruntling trades. Joseph Trevisani goes deep into the rationale he followed during the volatile EUR/JPY days of 2007 in this article.

    By Kim,

    • 0 comments
    • 302 views
  • Covered Straddle Explained

    The covered straddle is a perfect strategy for those all too common sideways-moving trends. When a company’s stock is in consolidation, how can you make trades? No directional trend exists, so most traders simply wait out this period.

    By Michael C. Thomsett,

    • 0 comments
    • 454 views
  • Why Doesn't Anchor Roll The Long Calls?

    Recently, an Anchor subscriber asked, “Why don’t we roll the long calls in the Leveraged Anchor portfolio after a large gain and take cash off the table?”  This question has a multi-part answer, from taxation to how the delta on a position works.

    By cwelsh,

    • 0 comments
    • 283 views

  Report Article

We want to hear from you!


I wish you would have mentioned I'd have to listen to 6 minutes of BS about mice and rats (lol).  With tastytrade education you get what you pay for.  In addition to the points you mention, these straddles can trade in a wide range the last day and by my observations are usually near their low at close where I assume they take the mark for their study.  

Share this comment


Link to comment
Share on other sites

I didn't want to be the only one who suffered those 6 minutes..

 

Good point about last day pricing. To be fair, they couldn't really test it because they have the EOD prices only. 

 

Regarding the price of education - yes, there’s always free cheese in a mousetrap, but I never saw a happy a mouse there!

Share this comment


Link to comment
Share on other sites

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.

Share this comment


Link to comment
Share on other sites
Guest Minty415

Posted

10-11am CT daily they have a segment where u can call them live on air to discuss anything u want. Would love to listen in

Share this comment


Link to comment
Share on other sites

Sold several atm the straddles on the day of expiration. Works as well.

Share this comment


Link to comment
Share on other sites

You mean you sold them before earnings and held through earnings? Of course it can work - in fact, it will probably work for most stocks because on average, options are overpriced before earnings (but your return on margin will usually be very small and not worth the risk).

 

But this is not what the study was about.

Share this comment


Link to comment
Share on other sites


Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs