Leaderboard

That is correct. But returns have to be considered in context. First, you need to consider the holding period. We hold those trades on average 5-7 days. So making 5% in less than a week is not too bad. Second, you need to look at the risk. We rarely lose more than 7-10% on those trades, so the risk is relatively low. And the winners can be significant, especially if the overall market volatility spikes. And the most important thing - as I mentioned, it could be a cheap black swan protection. So you basically have portfolio protection AND get paid for it. I'm not familiar with another strategy that can hedge your portfolio not only for free, but actually produce gains.

Kim, I went over your track record, and as far as I can see, the average return of the straddles is around 4-5%. Is it even worth the effort?

You are absolutely right. We do extensive backtesting to determine which stocks are suitable to trade earnings straddles. It will always be a race between theta and vega, and the race is not linear. We need to enter at the point where theta is winning, e.g. the price is low, before vega causes it to spike. In some cases like our recent ORCL trade, some members were able to milk the same stock 2-3 times.

Thank you Kim. I have been using earnings straddles for years with great success. As you mentioned, stock selection is very important and not every stock will work for this strategy. It is critical not to overpay for the straddles, based on prices on previous cycles.

I mostly use straddles for pre-earnings trades on stocks. Sometimes I would use it to do straddles on ETFs but I need IV to be very low to do it.

Kim thanks for a great article. Are you using straddles on indexes or ETFs or only on stocks?

Thanks for mentioning it. Another factor to consider in favor of index options.