The Volatility Option Trade After Earnings in Micron Technology Inc Date Published: 2018-08-10 Disclaimer The results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. LEDE This is a slightly advanced option trade that bets on volatility for a period that starts one-day after Micron Technology Inc (NASDAQ:MU) earnings and lasts for the 6 calendar days to follow, that has been a winner for the last year. We note the use of strict risk controls in this analysis. Micron Technology Inc (NASDAQ:MU) Earnings In Micron Technology Inc, irrespective of whether the earnings move was large or small, if we waited one-day after earnings and then back-tested going long a one-week straddle (using two-week options), the results were quite strong. This trade opens one-day after earnings were announced to try to find a stock that moves a lot after the earnings announcement. Simply owning options after earnings, blindly, is likely not a good trade, but hand-picking the times and the stocks to do it in can be useful. We can test this approach without bias with a custom option back-test. Here is the timing set-up around earnings: Rules * Open the long at-the-money straddle one-calendar day after earnings. * Close the straddle 7 calendar days after earnings. * Use the options closest to 14 days from expiration (but more than 7 days). This is a straight down the middle volatility bet -- this trade wins if the stock is volatile the week following earnings and it will stand to lose if the stock is not volatile. This is not a silver bullet -- it's a trade that needs to be carefully examined. But, this is a stock direction neutral strategy, which is to say, it wins if the stock moves up or down -- it just has to move. RISK CONTROL Since blindly owning volatility can be a quick way to lose in the option market, we will apply a tight risk control to this analysis as well. We will add a 40% stop loss and a 40% limit gain. In English, at the close of every trading day, if the straddle is up 40% from the price at the start of the trade, it gets sold for a profit. If it is down 40%, it gets sold for a loss. This also has the benefit of taking profits if there is volatility early in the week rather than waiting to close 7-days later. Another risk reducing move we made was to use 14-day options and only hold them for 7-days so the trade doesn't suffer from total premium decay. RESULTS If we bought the at-the-money straddle in Micron Technology over the last year but only held it after earnings we get these results: MU: Long Straddle % Wins: 75% Wins: 3 Losses: 1 % Return: 128.6% Tap Here to See the Back-test We see a 128.6% return over the last year and a 75% win-rate. ➡ The average return for the last year per trade was 33.05% over 6-days. ➡ The average return for the last year per winning trade was 53.81% over 6-days. ➡ The average return per losing trade was -29.24% over 6-days. An Alternative For the the more advanced option trader, a similar approach to this strategy would be to sell a strangle around this straddle turning it into an iron butterfly. MOVING FORWARD In a few mouse clicks and about 30 seconds, you can identify a pattern that has repeatedly turned a profit over and over again, then see those results with no room for confusion or doubt. You can tap the link below to become your own option expert. Tap Here, See for Yourself Risk Disclosure You should read the Characteristics and Risks of Standardized Options. Past performance is not an indication of future results. Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment. Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition. Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.
I am not trying to be knit picky but option beginners may be enthralled but there is some wrong information that needs to be highlighted here. I think it is a slight mistatement to say the least to claim 14 day options insulate you from theta decay as a risk reduction move. A long straddle with 14 days to expiration suffers from great theta decay. This is not a risk reducing move except to say the 14 day straddle is cheaper than going out 30 days so less premium cost/risk. But there is nothing reducing hte risk of theta here at 14 days out. The alternative suggested is taking a long straddle and converting it into limit reward strategy where if you leg in you are not going to have anyway near the profit being offered here. You are selling the short-term strangle after vols have crushed so you are not getting much premium and I don't think any advanced option trader would open an Iron Butterfly as an opening trade versus legging into one. Would be cheaper to simply do a short FLY.