As some of you know, I’m an options trader, and I really enjoy a good straddle during earnings season, and as I embark on my 4th straddle of the quarter with AAPL tomorrow there is one sure fire way to turn a profit without having to wait for the earnings report. The best part, almost guaranteed to win...with a tiny bit of research. So, first things first, this involves buying a straddle (simultaneously buying an At The Money call and put for the same expiration). The money maker is “WHEN” you buy it. An interesting thing happens the day...day and a half...before an earnings report: The implied volatility (IV) spikes (especially for already volatile stocks). When the IV spikes, the premium for options (both calls and puts) rises. This strategey consists of buying the straddle 1.5-2 days before earnings, ideally when the IV is around 20-25% AND waiting till the IV reaches a peak, on the final day, before earnings and selling the whole straddle.

 

Now, this is important: Don’t get cocky and think you know the direction the stock is going to trade before earnings...stick with the straddle, because you’re not trying to make money off the price movement, you want to profit off the implied volatility. Time decay WILL be an issue, so wait as long as you can before you buy this. If you miss your window to grab it below 30%, then move on. I will not do this strategy more than 2 days from earnings, so I only lose 1 day of decay.

 

And here’s your example: Last Friday at close, AAPL options had an implied volatility of ~21-30% and a $190 Aug 3 straddle was ~$440-$500. Today (Mon July 30th) at close that same straddle was $700-$820 with an implied volatility of ~52%. And by the end of the day tomorrow, the IV might be as high as 70%+.

 

A word to the wise. This strategy works best for earnings reports that are high profile. FAANG, big financials, and semiconductors/chip stocks. The shortest term options will have the greatest jumps in IV, but also the largest time decay. You can check the theta before you buy and remember to multiply it by 2 to get your total decay per day. Use this to judge whether an implied volatility spike of 20%, 30%, or 40%+ will be profitable.

 

I have found that I make 15%+ on average from this strategy. Cheers!