I don't trade options at all because I've never bothered learning them. I only know the basics of buying calls and puts. I get this bright idea after seeing such violent moves in stock prices of momentum stocks like NFLX, FB, CMG, GOOG, TWTR in the past that if I hedged my bets by buying a call and a put before an earnings alert, and hope for a major move in the stock that the trade should turn out positive. What do the Option pros on here think? Is this a smart trade? Also, I put on a small trade, could you please look at it and let me know if I'll make any money on this trade if I hold until expiration or should I dump it at market open tomorrow? Thanks.
That's called a straddle or strangle. The problem is that they are too expensive and most times will lose money. You have to pick a direction and go with only Calls or Puts - not both.
What about setting price target, short that strike price and buy ITM option, that way you can be delta biased, and short vega for the subsequent IV fall.
You would lose money if the price barely moved. But if that is indeed the case you could just close the position right away to limit your losses. However, as you mentioned, small price movement is not an issue in Momos. For the first couple FB earning releases, on earnings day there would be massive price movement based on which direction Zuckerburg farted. You could definitely make a killing, if you bought at the right strike. Or, if you were feeling particularly confident about what direction it was going to go in, you could buy the appropriate option and then hedge with a deeper out or in-the-money option. eg if I think NFLX will crash, and its currently at $250, I may buy $1000 worth of short term puts at a $250 or $240 strike, hedged with a $100-200 deep out-of-money call at $270. Yes, if it falls the call will be worthless but thats the point. Its insurance. You need to play around and get a feel for it. But it can definitely work, and probably should be done to some extent to limit your losses.