Earnings season is upon us again. In the next 2-4 weeks, a good portion of the publicly traded stocks will announce their earnings. These announcements have the potential to cause some big movements. The problem is we don’t know whether the earnings announcement will cause a bullish or bearish move.
The straddle/strangle strategy is one way to try and capitalize on these big moves. A straddle is buying a call and a put for the same strike price. We don’t care whether the stock moves bullish or bearish as long as it is a big move. The idea would be that the move is big enough so that one option raises in value enough to offset the loss in the other option. A strangle is the same idea but using different strike prices.
Stocks that have historically moved significantly on earnings are going to have option prices that will be trading higher than normal. Leading up to the announcement, option prices will typically climb on these stocks. This is referred to as implied volatility climbing. Prices may start climbing a couple of weeks prior up to even a month prior to the announcement.
One way to find stocks to trade is through a screener such as found on http://finviz.com/ . Here you can specify to search for optionable stocks. You can specify stocks over or under a certain price if you like. I like pricier stocks (over $50) since their moves tend to be magnified. It’s also critical to have high average volume for the stock, at least 1 million shares. You can then choose earnings date for next week, next 5 days, or other time frames. Since we want to get prices before implied volatility is too high, you can choose this month. This will result in a large list of stocks. You can click on Financial above the list that displays so that we can see the earnings release date for each stock. Click on the column heading for Earnings to sort the stocks by earnings release date. Focus on stocks that are at least 2 weeks from earnings.
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