Recently I came across a question regarding playing straddles around earnings in anticipation of a wild swing one way or another. People have been reporting mixed results and were wondering why. I summarized some of my thoughts below.
If anyone has any comments or sees flaws in my reasoning, please feel free to point them out. I`d rather be corrected than continue to be igonorant...
PS: a straddle is an option play where you buy both a call and a put, typically around the same strike price. This play will yield a profit if the stock price goes wildly on either direction, and loses money if the stock does not move far enough.
My take on Straddles:
IMHO, the issue with Straddles is that you are committing capital up front to buy two opposing positions. If you track the options premiums before earnings releases, you will find that the premiums are relatively high, because everyone knows that the stock will swing one way or another. This very knowledge causes the implied volatility of the near-term options to abnormally high levels in comparison to some further-out options.
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