This segment reveals the results of a two part study to determine if selling premium ahead of an earnings announcement to take advantage of the expected decline in volatility is a viable strategy. This comprehensive study is not to be missed.
An earnings announcement is a binary event and we expect a contraction of volatility afterwards. They also provide us an opportunity to stay engaged in the market. We generally use the options with the closest expiration to take maximum advantage of the expected decline in IV.
The problems with playing binary events such as earnings is that one bad loss can wipe out all our winners. We then have the choice of taking the loss by closing out the position or rolling out for duration and to collect additional premium.
A study was conducted from 2002 to present. The study examined 22,760 earnings announcements. We sold a 1 Standard Deviation (SD) Strangle before the earnings announcement and closed it immediately after.
A table was displayed of the results of the short 1 SD Strangle without applying any criteria. The table included the average P/L, percentage of profitability, largest gain and largest loss.
A second table was displayed of the same short 1 SD Strangle with a low VIX (under 15) and a high VIX (over 20). The table included the average P/L, percentage of profitability, largest gain and largest loss. The results should surprise you.
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the the takeaways, as well as other important information about selling premium around earnings, managing winners, and rolling losing positions to collect more premium.
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