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Selling "Cheap" Straddles After Earnings

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.

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.

The Study:
  • 12 years of data for AMZN, IBM, GOOGL, GS & AAPL
  • Sold 45 DTE Straddles after earnings and managed at 25% max profit
  • Total of 256 trades
  • Trade entry at end of day 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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