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I believe trading right before earning report
is a nerve wracking task since we don’t know what direction the stock will
move after earning. Long straddle is a strategy designed to play before
earning report of a stock.
Long Straddle: Buying at-the-money
call & put with the same expiration date.
Leg One: buy to open ATM call.
Leg Two: buy to open ATM put.
Potential Profit: When the combined
value of the two option contracts is greater than the net debit.
Max. Loss = Net Debit.
Main points: For this strategy to work, the stock
has to move BIG one way or another after earning report to offset
the volatility collapse. Before earning report, the volatility is high
due to the uncertainty of stock movement. After earning report, the
volatility collapses since the uncertainty factor is gone. Volatility
collapse will bring down the option price so we need the stock to move BIG
up or down to be profitable in this strategy.
Notice: This strategy is
simply a combination of buying at-the-money long call andlong put.
Dennis Phan 潘家墉
17 November 2012
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