Straddle on earnings -IV crush? How to avoid them?

Dear Friends,

I would like to know how to playing straddle on earnings? cause When I buy straddle and tomorrow the stock does not gap, my premium both Call and Put become loss average 30%. How to avoid them? What should I look before buying straddle?

Thanks

Herman

herm4n said:

Dear Friends,

I would like to know how to playing straddle on earnings? cause When I buy straddle and tomorrow the stock does not gap, my premium both Call and Put become loss average 30%. How to avoid them? What should I look before buying straddle?

Thanks

Herman

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There isn't a way to avoid it if you buy right before earnings. Either the stock moves more than what the market is pricing or it doesn't. The only way is to buy several weeks before when IV is still low, but then you have theta eating away until earnings. It's just shifting the risk around.

Because time value comes out of an option at an increasing rate towards expiry, buy a longer dated straddle.

But the proper answer is don't buy them!

A Dashing Blade said:

Because time value comes out of an option at an increasing rate towards expiry, buy a longer dated straddle.

Click to expand...

But then you don't have the Gamma.

A Dashing Blade said:

But the proper answer is don't buy them!

Click to expand...

Hmm.

Why not identify the ones where the option price is going to fall and sell them instead?

herm4n said:

Dear Friends,

I would like to know how to playing straddle on earnings? cause When I buy straddle and tomorrow the stock does not gap, my premium both Call and Put become loss average 30%. How to avoid them? What should I look before buying straddle?

Thanks

Herman

Click to expand...

If you are following some fake guru's advice that earnings release is one of the "stock market secrets" that produces a large magnitude move that allows you to make a guaranteed return with a straddle, it is time you ask for a refund on that few thousand USD that you paid.

The problem with this approach is that Straddles cost a lot in terms of premium, commission and spread loss. Yes! Spread loss! Bet that "guru" didn't mention this, right? Spread loss can cause an instant 10 to 15% loss per leg for a total of an instant 30% loss the very moment you put on a straddle! This is even worse if you put a straddle on options that have very wide bid ask spreads. The combined effect of these losses create a situation where you can profit only when a stock moves EXPLOSIVELY in one direction with a large magnitude... frankly, only 1 or 2 out of 10 stocks I see during earnings have such a behavior. For that 1 or 2 stocks that will move explosively, you can almost tell which direction it is going to be pretty easily by monitoring the run up to earnings and by simply buying calls or puts will give you an even better chance than a straddle.

Successful straddling is a fine balance of managing the front end losses with the back end probabilities and is far more complex than those "gurus" make it to sound.

Take heed.