Market Measures

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Earnings Cycles

Market Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

When we are looking to take advantage of the high Implied Volatility around earnings, we will place our trades when the shortest time until expiration. This allows us to see the largest amount of volatility come out of the options. However, is it viable to use an expiration cycle with more days until expiration, collect a larger amount of credit, have more time in case we are wrong and have a net a larger profit?

Today, Tom Sosnoff and Tony Battista look at the results of selling an at-the-money straddle in three different expiration cycles to take advantage of an earnings announcement. They compare using the shortest cycle (1 week), the following cycle (2 weeks) and the 4th cycle (4 weeks) to see if collecting a larger amount of credit relates to a higher profit. The guys find out that using the shortest time provides the highest profits and they see the highest percentage of max profit realized from these trades. One thing that is surprising is that by bringing in a larger amount of credit, you extend your breakevens so the further dated trades have a higher win rate!