Option Straddles Around Earnings Announcements

Posted in Equity Options, Volatility Effects

 

Does market underestimation of stock price uncertainty around earnings announcements support a short-term straddle strategy (call option and put option with matched strike and expiration, profitable with large stock price moves)? In their January 2013 paper entitled “Anticipating Uncertainty: Straddles Around Earnings Announcements”, Yuhang Xing and Xiaoyan Zhang investigate the performance of short-term, near-the-money straddles during intervals around earnings announcements. Short-term means no more than 60 days to expiration. Near-the-money means moneyness in the range 0.95 to 1.05. They focus on a delta-neutral straddle constructed by appropriately weighting the call and put positions at initiation, but they also consider a simple one call-one put alternative. They examine several straddle holding periods starting at the close five, three or one trading day before scheduled earnings announcement date and ending at the close on or one day after earnings announcement date. They calculate option returns based on the mid-point of the daily closing bid and ask as a fair option price (and require it to be at least $0.125). Using daily stock returns and option prices (with data filtered to exclude implausible data), along with contemporaneous quarterly firm fundamentals, during January 1996 through December 2010, they find that: (more…)

Please or subscribe to continue reading...
Gain access to hundreds of premium articles, our momentum strategy, full RSS feeds, and more!  Learn more

Already Have An Account?
Questions?