What's up guys? I just wanted to share a new options strategy I ran across and start some discussion on it. Basically, it is a straddle strategy. First, you purchase a straddle consisting of an in the money put and call. This has to be done in the front month with one week left to options expiration and an earnings report coming out within that week. Second, sell the exact same strike prices in the back month or sell one strike price above and below. The strategy basically hopes for a gap or increase in volatility due to an earnings surprise. It loses some of its profits because of selling in the back month. But it hopes to gain because the rate of change in the front month is higher than the rate of change in the back month (which has more time value). Sorry if I made any mistakes with the terminology, I'm new at this. Thanks a lot for your response. Let's start some discussion. Hopefully this makes somebody money.
A straddle refers to buying or selling a put and call with the same strike. Volatility is highest at the money and thus if you are going to try this, you'd probably want the ATM straddles. Nevertheless, volatility tends to increase pre-earnings and decrease thereafter.
The problem with a straddle is that your underlying has to move one hell of a lot in a short time in order for you to start to see green. And if you fail, which is likely, you lose on both premiums. I've made a few bucks on straddles on drug stocks, but only when I had a sense that an FDA approval or rejection was coming up. You need that kind of move to make any profit, and that is very unusual.