Earnings straddles

Discussion in 'Options' started by erol, Mar 18, 2010.

  1. erol


    I was thinking... Front month pre-earnings IV is usually high and will likely drop post earnings.

    So wouldn't it make sense to buy back month straddles? I'm sure the spreads are wider but I'm guessing they won't suffer same change in IV.
  2. spindr0


    With IV expansion, all months inflate, more so the front month. After the EA, the near month's IV will contract more but the far months "may" lose more value. I don't know the technical description so perhaps a hypothethetical example.

    Suppose IV is 50 across the board. The front month expands to 70 while the 2nd and 3rd month go to 60. However, the front month ATM straddle costs $1 more, the 2nd month costs $1.50 more and the 3rd month costs $2 more. So while the IV loss is more in the front month, the dollar loss is greater in the back.

    Obviously this is simplistic since pricing depends on the time remaining until expiration, the amount of IV expansion/contraction per month, etc. But in general, going out further isn't a guarantee that you'll suffer less.
  3. erol


    that makes sense... due to higher vega...

    well that sucks lol

    I knew it was too good to be true!