Summary: One way that we look to increase our number of occurrences is by trading earnings announcements. Earnings allow us to take advantage of high implied volatility (IV) in a one day, binary move. Since we know that IV tends to be overstated, these events provide us with an excellent opportunity to sell premium. Today, Tom Sosnoff and Tony Battista look at a huge study to see if selling a straddle is a viable strategy for earnings trades. The guys go back to 2007 through the present and take a look at 19 underlyings, all of which are trading under $100. They look at these lower priced underlyings because the margin requirement will be lower and thus, they can get a higher return on capital (ROC). After all is said and done, they find out that the straddle had over a 70% win rate. This translated into a total profit of over $9,000. One thing to keep in mind is that the biggest drawdown was around $600. Even after this large loss, the strategy was still very profitable and is a great way to take advantage of the high IV that accompanies earnings announcements!
