Market Measures

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The Earnings Edge Market Measures

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.

Earnings season presents a great opportunity to trade. As volatility builds, we can trade neutral around the announcement and play the volatility crush. How have short strangles performed around earnings announcements?

The Study:
  • Sold 16 delta strangles with 5 DTE
  • Sold 25-16 delta iron condors with 5 DTE
  • Five underlyings prior to earnings
  • Managed all trades at 50%
  • 2014 to present
Results:

Earnings trades outperform when the actual move of the underlying is less than the expected move (as calculated by IV). In an attempt to reduce the losses from adverse moves we compared the results of selling strangles to selling iron condors. Winning percentages and average P/L were significantly higher for short strangles when compared to short iron condors. Attempting to contain losers with defined risk did not end up improving performance. In conclusion, earnings season presents a great opportunity to trade if we strategically trade the highest prices options as determined by implied volatility rank and other metrics.

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