This segment tests the strategy of being long premium going into earnings by buying straddles 5 days prior to the earnings release and selling following the announcement. It builds on previous segments challenging the advice given by a Goldman Sachs strategist in a recent Barrons article.
A study was conducted from 2002 to present buying straddles five days before earnings and selling them after the release of the earnings. A total of 529 stocks were covered with a total of 17,966 occurrences. All the stocks chosen had open interest greater than 500.
A table showed the results that were profitable and not profitable for the occurrences. The results included average amount paid, average Profit/Loss and average return on amount paid. A graph was shown of the cumulative profit/loss of this strategy from 2004 to present. Another graph plotted the Profit/Loss of individual trades using this strategy. A table showed the percentage of profitability, average P/L, Median P/L, Max Profit and Max Loss from 2007 to 2014 (previous years showed similar numbers and were excluded for space considerations).
Watch this segment of "Market Measures" with Tom Sosnoff and Tony Battista for the results of this study and to see if buying straddles going into earnings is a strategy that makes sense.