Just bought NKE Jan 100 straddle for debit of 5.82. Option prices seem relatively cheep considering its right before earnings announcement. Any ideas on how it might play out? All comments are welcome! ps. my first straddle play
Straddles very rarely pay off, especially during earnings. One thing you can do to reduce your cost is to sell an equal amount of OTM options with the same expiration about 2 strikes from your long position. This will cap your gains if the rare big move happens and reduce your loss if no move happens.
Learning exercise. Go to www.ivolatility.com and enter NKE in the ticker symbol location. Then look at the chart for historical IMPLIED VOLATILITY. Then compare where the IV is today for NKE compared to where it has been a few weeks ago. To cut to the chase, current IV is at 25% or so. Last month it was at 16%. The high for the year is 28% last December (presumably before earnings) and the low is just under 16%. So you are buying a straddle when IV is near historical highs. In December of last year, IV crashed from its high of 28% or so to about 18%. So what does this all mean. High IV means premiums are higher in value relatively. When earnings are released IV crushes. So your straddle will most likely go from an IV of 25% to somewhere below 20%. If you are not sure what that means, plug your straddle in an option calculator and change the IV from 25% to 19% and see what happens to the value of your straddle. It will drop sharply. So before putting any money into a straddle you should study volatility and the effect it has on option prices. Basically with respect to volatility you are buying high and gonna sell low after the news. So you need a real nice stock move to overcome the volatility crush AND time decay that will start creeping in...
Hi optionscoach, Would you agree that opportunities from Straddles are rarely profitable when it comes to earnings announcements? I trialled a few in the last round of earnings announcements in the last 2-3 weeks. I paper trade now with (Virtual Trading with optionsxpress) since early on my mistakes were becoming costly with real money. Without opening out my paper trading diary only 1 or 2 were mildly profitable. Before each candidate I was careful to select stocks weeks prior when IV was relatively low and these stocks historically made big gaps/runs with earnings announcements. I have some feeling that straddles are seasonally profitable and that for most part it was a good time for this strategy. I would appreciate any guidance you can provide on this situation with respect to your experience with Straddles. Thanks winters1