From my understanding straddle price should increase going into earnings (due to rise in IV), and should be able to offset if not overcome theta decay. However, Tasty trade has covered this topic and mentioned that straddles do not increase in value despite IV increasing going into earnings: https://www.tastytrade.com/tt/shows...des/buying-premium-before-earnings-04-26-2016 I am aware that tasty trade's test method can be iffy and misleading. During their testing, they purchase the straddle close to expiration, and vega will be very low and theta decay will be high.. So my questions are: -What if you purchase the straddle with 30-45 DTE? Vega should be higher and theta decay should be low. -Is the test done by Tasty trade simply a bad entry for this play? -For those who have had success with this play, any tips on determining what DTE and strike price should the entry point be ? Thanks!
If you buy a straddle before an event, you can also trade the stock vs that position up to the point you exit. With regard to, if the general value of the straddle will go up, that depends on how well you buy it and how perception changes up to the event. LVX is an excellent tool for this type of trading. https://www.lightspeed.com/trading-platforms/livevol-x/ It will provide information for you to make your decisions. Bob
theta will increase to offset any expected vol increase because the earnings is priced in even at 30-45DTE
I messed with earnings straddles for a while and found Optionslam to be very helpful. Keep in mind that the IV for stock options reflect the market's perception of future price movement. If the market expects a big move the options are expensive, if a small move then the options are cheap. Either way you need a big surprise to make money. The market is usually right.
If the market expects a big move on a particular option, and options value have gone up, that means IV is already high, right? What if you enter the position before the the IV increase and just prior to the market expecting a big move. Or is this timing too difficult to gauge?
Yes. You're trying to place a wager at the track against the folks who breed the horses. You'll never win consistently. A waste of your time.
30-45 DTE is way too long of a time period to stay long. Theta decay is going to pretty much take away 30% of your value if the underlying stays neutral. I have experimented and backtested with various underlyings on both long and short straddles. A lot depends on the underlying. Certain rally stocks (FB, AMZN, MSFT) tend to breakout and rally few weeks before earnings. A mix of a directional move along with the IV change will increase the value of your long straddles, provided you go long right before the IV rise. Additionally with too many players trading IV, there have been changes in IV trends. What used to be IV crush after earnings release, some more popular stocks are exhibiting signs of "premature IV crush", like a couple of days prior to earnings. Therefore, timing your IV crush is under such circumstances is also key. IMHO, staying long on a theta decay and unexpected IV crush is rather disheartening to an option trader.
Yes I have noticed the premature IV crush you mentioned. I was thinking of holding the position until 1-2 weeks prior to earning. Please note that I haven't thoroughly tested this, but the idea is to enter as IV is rising so that vega hedges some theta decay. And hope for a large movement. I guess the general feedback is that the timing for entry would be to difficult to gauge. Off to explore other avenues around earnings I guess.
So true. Many had tried to time a major event but very few succeeded. I now avoid trading before/during/after an earning event.