Sorry G-girl, my comments were directed to tj1320 who started this thread. From your comments it does sound like you are more familiar with options trading. tj1320 sounds like a beginner, and the proposed strategy is very dangerous for him/her. Hence, the comments above.
Perfect example of why earnings are risky. LMT is DOWN $1.48 on an announcement that net income is up and outlook is lifted. Argghh.
Most of the posters in this thread already know this, but going long premium in 1 direction before earnings is gambling. As for the straddle/strangle, in the long run it's a losing proposition.
Since vol implosion is the standard behaviour after earnings come out, why not choose a pureshort volatility strategy and remove directional bias? Depending on the volatility curve between front and back month I would consider short ATM calendars or straddle/strangle swaps.
this strategy don't works so well since VIX broke 20th. The average vols on optional stock's universe is about 33 now ; do you really want to short at those levels into report ?
Short ATM calendars work fine, but the stock still has to move. In my experience, more often than not the backmonth IV won't crush as hard which is the major problem. If it does, or the stock explodes, it's a winner. As for straddle/strangle swaps, if you long the backmonth youre still long vega. If you long the frontmonth, you have 2 diagonals with a risk profile similar to a short ATM cal. To construct a position which is vega- and other greeks neutral at that point in time, play around with a risk modeler. I haven't looked at one yet. After all that greek talk, just long the ATM fly or iron fly to short vol before earnings. If you hit it, great.
About 3k lost of stats. Last year Jan to Aug, this was my style of trading. All earnings plays, sometime long straddle/strangle, sometimes long 1 directional. I looked at pretty much everything, from put/call ratio to volume and chart patterns. Some worked, some didn't. Bought high premium on 'story' stocks, bought high IV on longshots. Nothing conclusive, I even went into some Eliott wave mode with rangebound gappers. The market prices stuff in pretty well. I have read several of your posts, and I imagine you are just asking me to back my claims up. If you are actually wondering why, I or someone more experienced would be glad to answer.