tastytrade logo
uploaded image

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.

Related Posts

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com. 

tastytrade is a trademark/servicemark owned by tastytrade.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).

tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with tastytrade (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. tastytrade is the parent company of tastyworks. tastyworks and Marketing Agent are separate entities with their own products and services. tastytrade has different privacy policies than tastyworks.

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

© copyright 2013 – 2022 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on tastytrade.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.