Straddling Stocks that Move Big into Earnings

Tom Gentile

Posted in
Education

By: Tom Gentile
January 23rd, 2024

4 mins read

Our best guide to successful trades is historic performance.  If you can find a stock that repeatedly rises into earnings or repeatedly drops into earnings coupled with Implied Volatility (IV) rush, you have a good chance of history repeating.  As I’ve spoken about in prior articles, this is at the heart of my directional earnings trades.  Get direction right most of the time using history and amplify profits with pre-earnings IV rush.  AND, when history doesn’t repeat lose less money due to IV rush.

Now, some stocks don’t move consistently up or consistently down into earnings.  However, some do move hard up AND down consistently into earnings.

Conagra Foods (NYSE: CAG) on September 11, 2023
Conagra Foods (NYSE: CAG) on September 11, 2023

Notice that the stock ran up hard two earnings announcements prior and then down one earnings announcement prior (green “E” triangles are earnings announcement dates).

Of course, we can’t on the stock moving up or down given the mixed directional movement the prior two earnings, so buying a call or put is a 50/50 proposition.

That’s where straddles come in.  We can literally place both sides of the fence by buying a call AND a put.  The call will make more money than the puts lose if the stock rises and vice versa.

All of this can easily be seen in a risk graph.

Rick Graph: Profit and loss situation of straddling CAG
Rick Graph: Profit and loss situation of straddling CAG

The above risk graph illustrates the profit and loss situation of straddling CAG.  Buying an October 6, 2023 $29 Call and buying an October 6, 2023 $29 Put creates a straddle that will profit should CAG move anywhere.

Of course, there is risk if CAG doesn’t move as illustrated by the “witches hat” portion of the risk graph.  As time erodes, value bleeds out of the option.  The red, blue, green and black angular line are 4 snapshots in time that illustrate time decay.  Max risk in the straddle lives at expiration on October 6, 2023 at the straddle strike price of $29.

Working against time decay is Implied Volatility (IV) rush.  We know IV will rush into earnings, so even if the stock doesn’t move, we can count on losing less than if we didn’t have the benefit of pending IV rush.

Scouring stocks and crunching numbers would be far too time-consuming, so I use scanners to find these trades for me.

Below is the scan result for CAG revealing that straddling CAG 24-days before earnings produced an average 54.14% ROI and a massive IV rush of 288.78% over the past 2 earnings.

Image 35
CAG Scan Result – 24-days before earnings

History.  Plain and simple.

Will it repeat?  

Most of the time it does, and with the built-in risk mitigation of earnings straddles coupled with IV rush into earnings, winners normally outpace the winners.

Let’s see how this trade did.

Here is the risk graph page on the entry date of 9/11/23:

CAG risk graph data 9/11/23
CAG risk graph charts 9/11/23

We had $447 of risk on this trade with the plan to exit on 10/4/23, the night before earnings the morning of 10/5/23 (BMO).

Here’s how the straddle looked on the exit date of 10/4/23.

CAG risk graph data 10/04/23
CAG risk graph charts 10/04/23

The stock tanked into earnings (like it did the prior earnings period) netting a 56.4% profit.

Now, the secret sauce is the IV rush.  IV rush increases option premiums across various strike prices.

The IV charts below reveal IV on the entry date and IV on the exit date.

IV Entry on 9/11/23 and Exit on 10/4/23
IV Entry on 9/11/23 and Exit on 10/4/23

The options purchased on 9/11/23 were a lot more expensive on the exit date of 10/4/23.

Simply said, the large IV rush added more profit to our trade.

Optimizing entry dates for pre-earnings straddles requires computers, however, some general rules of thumb to use would be:

  1. Find stocks that consistently move big into earnings.
  2. Place an ATM (strike close to stock price) 7-days into earnings.
  3. Use the first expiration date available AFTER the earnings date.

Be sure to practice without using real money until you derive a system that produces consistent overall profits.

Tom Gentile
C1P: Chief 1-Percenter

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