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Market Measures

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Duration | Earnings Trades

Market Measures

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

When looking to place an earnings trade, which expiration cycle should you use?

This segment reveals the results of a study that seeks to provide hard data for earnings plays on the tradeoff between using an expiration with fewer days to expiration (DTE) and higher volatility to one with greater DTE but lower volatility. The results should help traders decide what is best for them.

Stocks tend to move less than the implied volatility (IV) would suggest according to our previous research. This is most obvious around binary events such as an earnings announcement. What has been the most profitable expiration month to trade to take advantage of this crush in implied volatility and what is the trade-off? A graph of the IV of YUM before and after earnings was displayed which shows the rise and decline of IV.

A great way to increase our number of occurrences is by trading options around binary events, such as earnings announcements. They are often accompanied by high IV (and high IV Rank) due to the uncertainty of these events. What are the benefits and detriments of using one expiration versus another?

After looking at an extensive study, Tom Sosnoff and Tony Battista find out that using the shortest dated expiration provided the largest amount of profits and you were able to capture the highest percentage of the overall premium. If you were to use the longer dated expirations, you should see a small reduction in profits but a higher overall win rate.

Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the results of the study and see the pluses and minuses of the different expirations put into hard numbers.

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