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

  • Probability and Option Risk

    A lot is said about probability of profitable outcomes in option trades, but do we truly understand what probability is or how it works? Options traders can become better informed and even wiser by looking a step beyond the well-known conclusions.

    By Michael C. Thomsett,

    • 0 comments
    • 169 views
  • Using ORATS in Anchor Testing

    The purpose of the below piece is to demonstrate how Lorntine Capital uses ORATS (Options Research and Technology Services) in our own backtesting. Note: ORATS does not pay me for writing this but has requested that if we like the software, we assist in promoting it.

    By cwelsh,

    • 1 comment
    • 327 views
  • Calculating the Probability of Option Payoff

    A calculation of “breakeven” as well as maximum profit or loss, sets up a single system for modeling and comparing one option to another. But it might also require traders to adopt an unrealistic assumption about outcomes based on best-case or worst-care scenario.

    By Michael C. Thomsett,

    • 0 comments
    • 354 views
  • Realistic Expectations: Using History as A Guide

    One of the biggest challenges I come across with the typical investor is maintaining realistic expectations and being able to properly understand the tradeoffs between risk and return. We all want high returns with low risk and there’s no limit to the efforts we’ll make to find it.

    By Jesse,

    • 0 comments
    • 383 views
  • CAPM As an Alternative Option Pricing Model

    Options traders endlessly debate the merits of the Black-Scholes pricing model. Some swear by it and others don’t even try to use it. Given the many profound flaws in the model, it is not an accurate tool for developing a sense of where price is likely to move in the future. But there are alternatives.

    By Michael C. Thomsett,

    • 0 comments
    • 564 views
  • Option Payoff Probability

    Options traders must, naturally, be concerned with the likelihood of payoff for a strategy. Ironically, one of the most often cited statistics about profit and loss is simply incorrect. That statistic is captured in the headline of a story posted online “Trading Options: Data Shows That 75% or More of Options Expire Worthless.”

    By Michael C. Thomsett,

    • 0 comments
    • 651 views
  • The Minimum Effective Dose (MED) For Cash Flow Planning

    Financial planners can usually give generic advice that will be appropriate for the majority of Americans, and that’s the goal of this article. If we can get the fundamentals of cash-flow planning right (where to put your money after you earn it and pay your taxes and bills), we’re 80% of the way towards maximizing our financial situation.

    By Jesse,

    • 0 comments
    • 653 views
  • Are You Breaking Even? Or Losing?

    Among the good reasons to trade options is the need to meet or surpass your breakeven yield. This is the yield you need just to preserve your purchasing power; and it higher than most people think. In fact, most people relying on moderate to conservative yields from stocks, mutual funds, real estate and savings accounts might be earning well below this breakeven level.

    By Michael C. Thomsett,

    • 0 comments
    • 754 views
  • Buy When You Have the Money, Sell When You Need the Money

    Money can be quite an emotional topic for many of us. Emotions can enhance our experiences and relationships in many ways, but they can act as mental roadblocks especially when trying to make wise financial decisions. One of the most common emotional roadblocks I come across when working with individuals is an unwillingness to invest idle cash to meet long-term goals.

    By Jesse,

    • 0 comments
    • 1,523 views
  • Strategy Selection vs. Risk Management

    "A billion here, a billion there, and pretty soon you're talking about real money." Everett McKinley Dirksen. Let’s begin with the bottom line: When I talk to anyone about the concept of choosing an option strategy (or two) to adopt for trading, I stress that the strategy should have certain characteristics.

    By Mark Wolfinger,

    • 0 comments
    • 716 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