Earnings can be a tricky game, and trading such events may not suit your strategic approach and/or risk profile.

While most earnings events see an uptick in implied volatility leading up to the announcement, the actual move on earnings can sometimes exceed expectations - leading to large potential losses for short premium players.

On the flip side of the coin, buying premium for earnings when implied volatility is inflated can also result in losses. For example, if a given earnings announcement fails to move the underlying stock, then implied volatility usually drops in rapid fashion - along with your (long premium) P/L on the position.

Despite the risks outlined above, some market participants live to trade earnings.

Traders with deep pockets can deploy a high number of occurrences that capture earnings, and rely on statistical averages to produce a net positive P/L. If you want to learn more about how volatility traders approach earnings from a strategic perspective, we recommend reviewing this previous blog post - "Earnings: Past Moves vs. Expected Moves."

If you are already familiar with earnings, and want to continue learning, then we recommend reviewing a new episode of Market Measures. The show focuses on research conducted by tastytrade that may help broaden your perspective when trading such events.

The question explored on this episode relates to the duration of an earnings trade, and whether there may be hidden benefits when extending the duration of such trades. For example, is it better to let an earnings trade work for one week, two weeks, or three weeks?

In order to answer this question, the Market Measures team put together a study in which they backtested historical trading data to help gauge how a given earnings trade performed when it was left on for one week vs. two weeks vs. three weeks.

The other parameters of the study were as follows:

  • Utilized historical trading data in AMZN, JPM, and IBM

  • Sold 16 delta strangles of varying duration prior to earnings

  • Investigated three trade durations: 1 week, 2 weeks, 3 weeks

  • In every case (no matter the duration), a short strangle was deployed the day before earnings

  • As such, the main difference between the three approaches was simply how long the trade was left on (1 week, 2 weeks, or 3 weeks)

The slides below summarize the findings from the study, and appear to indicate that extending a given earnings trade may help increase the potential P/L, as well as reduce the standard deviation of the P/L.

Exploring Options for Earnings
Exploring Expirations for Earnings

While all three symbols (AMZN, JPM, IBM) showed improved results for an earnings strategy that relied on extended duration, the most improved of the group was AMZN.

This information is certainly intriguing, but more evidence is needed to fully analyze the comprehensive impact of extending duration in earnings trades. We hope to crunch that data and unveil the associated results sometime soon - so stay tuned!

If you want to learn more about trading around earnings, we also recommend reviewing previous tastytrade research that explored the performance of short premium trades initiated after an earnings announcement. In this case, the goal was to investigate how short premium trades performed in the wake of earnings - meaning the event had passed before the trade was initiated.

By trading after earnings, that usually meant that implied volatility was lower (in absolute terms) at the time of trade deployment. While that may not sound optimal, one must also consider that the release of earnings theoretically implies that most of the important information related to a company’s ongoing operations had just been made public. In turn, that would theoretically mean there was now a lower likelihood for “surprises” which could catalyze big moves (not counting unexpected mergers or takeouts).

For a full rundown of tastytrade’s research on selling premium after earnings we recommend reviewing this previous episode - Tasty Bite: Selling Premium After Earnings.

If you have any questions about corporate earnings, or want to share past experiences trading these events, please leave a message in the space below, or reach out directly to @tastytrade on Twitter or send an email to support@tastytrade.com your convenience.

We appreciate your feedback, and look forward to hearing from you!

Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.

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