For some company’s earnings reports, the market is preparing for a large stock price change either bullish or bearish after the earnings announcement.
This anticipation leads traders to purchase options before the earnings announcement which pushes the option premiums and implied volatility higher for that stock.
Delphian calls this strategy a Volatility Rise (Vol Rise) and based off of testing, the option premium run-ups typically start within 2 weeks of the earnings announcement.
Align Technologies (ALGN) is an excellent example of a stock that consistently experiences high volatility rise prior to each earnings announcement.
A Vol Rise is designed to capture a 15-30% gain for a long straddle; a long strangle could be used also.
The trade is designed to profit from an increase in volatility before the earnings announcement.
The trade is closed when any of the following conditions are met: Profit target is met, stop-loss is met or the day prior to the earnings release.
Delphian's default vol rise criterion involves an at-the-money (ATM) implied volatility (IV) change that is greater than 15% from 10 days before earnings to earning day for at least 7 out of last 10 earnings reports.
The screener will analyze all historical data and generate a qualifying list of stocks. The screener criterion can be customized to match an individual’s trading preferences.
Any of the fields shown below can be altered to the user’s preference.
Delphian created the Earnings Calendar so users can quickly screen and backtest symbols on one screen.
Symbols can be tested individually or as a group using the bulk testing feature.
All the trading strategy fields shown below are customizable to the user’s preferences.
Below are the results of a backtest of a long straddle strategy for BAIDU, INC-ADR (BIDU) over the last 10 earnings releases, based on entering a trade with the characteristics shown above.
Over the previous 10 earnings, the long straddle position produced a cumulative profit of $2241 per contract with a profit factor of 7.48 and a win rate of 70%.
The chart below displays the individual trade results for the BIDU analysis performed above.
Vol Rise trades are repeatable each quarter and a fairly simple trade to execute. After trade entry, orders can be placed for profit targets and stop losses so you don’t have to watch the trade constantly.
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