Near-term option decay begins to slow in the days leading up to a company’sannouncement. Does this slowing decay before earnings present an opportunity to buy premium? A is one way to get long premium, but to win the battle of the option , and/or Vega must overcome the . This means we need a big move or a increase to offset the decay of the options.
A study was conducted with a total of 2,061 occurrences in the time period from 2010 to present using S&P 100 stocks that were trading over $20 and had an open interest of at least 500 contracts in their options. We bought the at-the-money (ATM) Straddle in the earnings cycle with 5 days to go before the earnings release. We then closed the position immediately prior to earnings. The study included $1.50 transaction fees and fills near the mid-price.
A table of the results of Long Straddles closed before earnings was displayed. The table included the average P/L, median P/L, percentage winner, max loss and max profit. The table showed the exact opposite results of being short premium. The winners were much larger than the losers but the frequency of losing trades offset the profit from the winning trades. A graph showed that most trades were not profitable and that although the profitable trades were much larger than the losing trades, winners did not occur often enough to make this strategy profitable. The 3 top winners profited from large directional moves, not.
For more information on going long premium into earnings see:
Market Measures on January 9th, 2015:
Market Measures on July 7th, 2015:
Market Measures on September 29th, 2015:
Market Measures on April 14th, 2016:
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the important takeaways and the results of our study on buying straddles before an earnings announcement.