In a previous Market Measure, we studied the profitability of buying straddles after the earnings volatility crush. The motivation for that study is that after the implied volatility crush, straddles would be relatively cheap. That Market Measure found long straddles to be an expensive, low probability trade. This research investigates the opposite trade; a short straddle post-earnings.
Options do experience a significant volatility crush after earnings (around 40%). Even with the volatility crush, long straddles are an expensive, low probability trade. The short straddles provided a consistently higher P/L and POP when managed at 25% even when volatility is relative “cheap” after an earnings announcement.
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