Trading Long Strangles Around Earnings | Tradecraft

TL;DR

Learn how to use the long strangle strategy to profit from increased implied volatility around earnings announcements.

Transcript

Earnings announcements are a popular time to trade options because the uncertainty leading up to the event can inflate options premiums. One strategy that traders can use to go long this rise in implied volatility is the strangle. But it's one thing to understand this strategy in theory, and another to see it in practice. To show how it could actua... Read More

Key Insights

• ⌛ Earnings announcements create uncertainty and inflate options premiums, making it an opportune time to trade options.
• 🤑 The long strangle strategy combines an out-of-the-money call and an out-of-the-money put to profit from a large price move or an increase in implied volatility.
• 🥺 Implied volatility plays a crucial role in the profitability of a long strangle, with higher volatility leading to increased potential profitability.
• 🪘 Trading long strangles ahead of an earnings announcement can make forecasting time and implied volatility easier compared to trading long options.
• ✋ It is important to pay attention to trade costs and historical movements to avoid paying too high of a premium upfront.
• 😚 Closing the trade before the earnings announcement can help avoid the volatility collapse that often occurs after the news.

Questions & Answers

Q: What is the long strangle strategy in options trading?

The long strangle strategy involves buying an out-of-the-money call and an out-of-the-money put. It profits from a drastic price move up or down or an increase in implied volatility.

Q: How does implied volatility affect the profitability of a long strangle?

If implied volatility increases, the entire risk profile of a long strangle strategy moves higher, resulting in increased potential profitability. Higher implied volatility is especially beneficial if the stock stays between the strike prices.

Q: Should I close a long strangle trade before an earnings announcement?

It is recommended to close the trade before the earnings announcement to avoid the volatility collapse that typically occurs after the news. Holding longer can offset potential gains or result in a loss due to the diminishing implied volatility.

Q: What factors should I consider when choosing the expiration for a long strangle?

Options closest to expiration tend to have the largest increase in implied volatility. However, longer expirations may offer higher vega and lower theta, making them attractive to some traders. Consider the likelihood of earnings-related implied volatility spikes when making your choice.

Summary & Key Takeaways

• Earnings announcements create uncertainty and inflate options premiums, making it a popular time to trade options.

• The long strangle strategy involves buying an out-of-the-money call and an out-of-the-money put, offering a neutral bias on the underlying stock's price.

• By combining options, this strategy can profit from a large price move or an increase in implied volatility, even without a significant stock price change.