Selling Options Before Earnings?

[carnyc 0]

I'm sure this is not part of SO strategy, but with the market being as it is currently, if one were to sell straddles, strangles, etc. prior to earnings and hold through earnings, wouldn't that be a reasonable way to take advantage of the subsequent IV collapse?

 

Obviously it depends on how much the stock moves, but where there is low volatility in the market, this seems like a viable play.  Do others agree, or do you see it as outright gambling?

[Marco 223]

options tend to be overpriced for earnings so if you put on enough trades you should in theory make money, problem is you may have the odd 200%, 300% 500%+ loser and basically unlimited risk if you short straddles. So if you find a way to manage that risk.....

[Kim 8,042]

I would never sell straddles/strangles naked, but doing it hedged (buying further OTM options) would work well for some stocks. Calendars can also work (selling near term buying longer term). However, those are much more speculative trades so allocation should be significantly smaller.

[carnyc 0]

Thank you Marco and Kim for the feedback.

 

Kim, what you're describing (doing it hedged (buying further OTM options)) is an iron condor, and would help protect against a significant post-earnings stock move, correct?

 

Agreed that it is more speculative and should receive smaller allocation, but I was thinking it might have some application where volatility is low (like now).

[Kim 8,042]

Thank you Marco and Kim for the feedback.

 

Kim, what you're describing (doing it hedged (buying further OTM options)) is an iron condor, and would help protect against a significant post-earnings stock move, correct?

Correct.