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Jul 30, 2015

Market Measures: Duration and Earnings

By:Sage Anderson

With earnings season still in full swing, we are keeping the spotlight firmly fixed on recent tastytrade programming that covers this exciting period of options trading.

Today, we take a closer look at a Market Measures episode covering different durations (multiple expiration months) and some key points to keep in mind when deploying any earnings-related strategy.

Duration, in terms of equity options, refers to days-to-expiration, or generally speaking - time to expiration. This concept may also be referred to as term structure. Generally speaking, this means the different months that contain listed options for a stock.

In a recent Market Measures, Tom Sosnoff and Tony Battista review a study conducted by the tastytrade team that examines the range of results achieved by trading earnings across different expiration months.

The show, entitled "Duration|Earnings Trades," specifically addressed whether shorter duration expiration months characterized by higher implied volatility produced higher returns than longer dated expiration months with lower implied volatility.

Tom and Tony highlight during the episode that the study back-tested selling an at-the-money straddle in 12 symbols across three different durations using data from 2012 to present, as illustrated below:

The results of the study revealed some interesting conclusions. First, the longest duration period (4 weeks) produced most profitable percent of trades at 67%. Likewise, this trade duration also involved the biggest credit per contract, which would be expected. The shorter duration trading periods (1 and 2 weeks) produced a higher average and total profit/loss.

The results are shown below:

Discussing the results, Tom and Tony note there were two main takeaways from this particular study:

- The nearest expiration had the largest average profit/loss, but a lower probability of profit.

- Extending duration provided a slightly higher probability of profit and a larger potential credit as well as more time to adjust errors due to the increase in time.

These takeaways go hand-in-hand with some other recent findings that were highlighted on the tastytrade network. In two other compelling episodes of Market Measures, Tom and Tony examined the past success of long premium earnings strategies in segments entitled "Long Straddles into Earnings" and "Goldman Sachs: Earnings Straddles."

Similarly, a recent blog post focusing on the Options Jive series reviewed a study looking at the value of earnings straddles and their associated implied volatilities as earnings approaches.

We encourage you to review the aforementioned episodes if you haven’t already done so. Additionally, you can delve further into earnings by accessing the “Learn” tab on the tastytrade homepage, or clicking here.

Please don't hesitate to leave comments, questions, or ideas for earnings-related programming below.

We greatly appreciate your feedback and involvement in the tastytrade community!


Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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