Straddles on earnings?

Discussion in 'Options' started by LAtrojan, Apr 22, 2009.

  1. LAtrojan

    LAtrojan

    Does anyone sell straddles prior to earnings?

    It's been pretty profitable so far this earnings season with GOOG, IBM and looks like AAPL too!

    I sold the AAPL $125 straddle 30 mins before the close for $13.15. The stock is trading AH very close to $125! I won't start celebrating until the open tomorrow but the options have a lot of volatility implied in them.

    Just curious to see if others are doing this.

    PS. Luckily I didn't do this for RIMM. It would've taken a big loss!
     
  2. kroponer

    kroponer

    Care to elaborate on your criteria? What made you choose AAPL and not RIMM?

    I've thought about doing this, but with unlimited risk...only takes one to fuck you up. Maybe on something conservative (relatively) like retailers, but on high flying techs? I dunno.
     
  3. LAtrojan

    LAtrojan

    What I've done is download historical data for AAPL and looked at how AAPL behaved on the day after earnings. I got historical earnings dates from MSN. I compare Q2 earnings behavior since there might be some seasonality in the earnings. So basically I saw that in the last few years, AAPL moved only about 3.5% (absolute value) after Q2 releases.

    Looking at the ATM straddle, the expected stock move was close to 13%. I thought it was a good gamble!
     
  4. While it's potentially a large risk, it's not unlimited risk. You can manage that risk by being aware of the amount of pre earnings IV expansion as well as the historical contraction post EA and modeling the data to know the approximate break even points. With that info, you can buy or short shares in the after hours sessions to manage your short delta.
     
  5. kroponer

    kroponer

    Thanks for the reply LAtrojan and spindr0. Learning new stuff : )
     
  6. kroponer

    kroponer

    Nice trade LAtrojan, from the closing price of the 125's yesterday your trade would have made 38% at the closing price today :) I know you said you entered 30 minutes before the close, but I'd imagine your profit was somewhere in that range. Good job!

    Also interesting is that the implied volatility yesterday was around 50% and today are 38%, a decline of 24%!