To The Moon

Hey friends, a new earnings season is coming. Options are very popular to used to bet earnings.

When people start to trade options, they always buy call or buy put option unilaterally. After that, some beginners realize that the odds of winning is not high forunilateral trading, some people start to make option strategies of straddle and strangle.

A straddle which a call and put with the same strike price and expiration date is bought. Usually these options are near ATM. 

A strangle refers to a call and a put option on distinct strikes, with the same expiration. Usually these options are OTM. If both of these options are ITM, then it is known as agut strangle.

Show as follow:The biggest advantage of straddle and strangle is that it doesn't judge ups or downs. it just belives  the volatility will increase to be large enough so that the income of one side is greater than the cost of both sides. The risk is the volatility is small and cannot offset the cost of purchasing two-side options.

FOR example, An investor bought the straddle on the $50 strike for $6. What price must the stock expire at in order for the investor to make money?

In order to make money, the value of the options must be more than $6. On expiation, the put and call options cannot be both in the money.

If the call was worth $6 or more, that means that it has an intrinsic value of $6 or more, or that the stock price was at least$50+$6=$56;$50+$6=$56.
If the put was worth $6 or more, that means that it has an intrinsic value of $6 or more, or that the stock price was at most$50−$6=$44 ;$50−$6=$44. 

Hence, in order for the investor to make money, the stock must be either above $56, or under $44.

The option strategies are often used for earnings, which can achieve good returns through volatility. Netflix$(NFLX)$And$Taiwan Semiconductor Manufacturing(TSM)$ will release results recently, there are a large number of straddle order transactions,as follows:​​​For straddle and strangle, the most I have seen are basically buying before the earnings release and then selling after the earnings come out.

But I want to give you another idea, which can also get good returns.

It is to buy straddle almost one week before the earnings date, and then sell it 1-2 days before it release. This method is different from the common method of selling after result comes out, which is to sell before the result comes out.

Mainly to earn brought by the sharply rise in volatility before the result released. Usually, the implied volatility (IV) will rise sharply 3-7 days before the earnings date, Buy options before the IV rises, and then make a profit when IV rises to a high point. For example, if the median value of IV of a company is 60%-70%, then buy call and put at this time. Then take the profit when IV has a high probability of 85%-90% . Some options exceed 100% before the earnings date.

Why do I do this?

I often say that be a option seller, but the stradde and strangle are option buyer. For option buyer, the biggest enemy is loss of time value. Usually, buy both call and put option that loss of time value is more than only buy one side. Theta, the Greek letter index of options, is the quantitative value of time value loss. Another Greek letter is Vega, which is used to measure the relationship between option price and expected volatility. If you want to learn about time consumption and expected fluctuations, you can use Vega and Theta to calculate them. But I don't think it is necessary to calculate this.

Simply, when the IV rise, the option price rise. Although the time value loss is large, the pushed-up IV can effectively offset the time value loss, and sometimes the price increase caused by IV greatly exceeds the time value loss, which often occurs in $Tesla Motors(TSLA)$ options.

Why don't me hold after earnings?

If the earnings don't bring a big move on underlying price, the IV of option will plummet. Especially near expiration date, IV will drop to close to 0. Superimposing the loss of time value, the total loss of this bet will be even bigger. However, if there is no big jump in IV before the earnings and the stock price doesn't have a big move, the losses will be limited, I guesses loss of 20%-30%.

It also needs to be emphasized that if the underlying price has started to jump high and IV has started to rise before , it may not be of great significance to buyin. Trading is a probability game. When IV will soar, to what extent, and different triggers with different targets, it is necessary to judge the specific situation. Every financial report of each stock is not the same. This is just a method.

Interested friends can try with the simulation disk. I see Tiger promoting the simulation disk.