This segment reveals the results of two studies related to earnings plays that have gone wrong and how to mitigate or reverse the losses. The study results give clear indications for a trader's course of action.
A short strangle or a short straddle is an undefined risk trade. Taking advantage of the usual rise in implied volatility (IV) and IV Rank a trader may put on such a trade ahead of earnings. When the trade goes wrong we can either close the trade for a loss or roll out for duration and collect additional premium.
The first study was conducted from 2011 to present using AAPL, LNKD and GOOG. We sold a 1 standard deviation strangle and closed the position the following day. We rolled the tested side (same strike) to the monthly cycle closest to 45 days to extend duration. A table showed the results of exiting without rolling and exiting after rolling once. The P/L, percentage of profitable trades, average credit and biggest loss were listed.
Sometimes our trades are winners right away. The decision then is do we exit when the market opens or do we wait until the end of the day?
A second study from 2011 to the present using AAPL, LNKD and GOOG. We sold a straddle on the close before the announcement. A table displayed both the straddle exited on the open and the straddle exited on the close after the announcement. The percentage of profitable trades and P/L were shown.
The study results were further broken to see how the trades developed during the day. A table displayed the number of winners that became larger winners, average P/L increase per trade, number of winners that became losers, number of losers that became larger losers, average P/L decrease per trade and number of losers that became winners.
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista to see whether rolling the tested side of an earnings strangle increases our profitability and win rate and whether a winner should be exited near the open or near the close.
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