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Stats › Individual stocks › Earnings straddles

Buying earnings straddles pays, until you weight by what you can actually trade

Equal weighted exit at announcement: 2.60%+2.60%Equal weightedexit at announcementOpen interest weighted exit at announcement: 1.10%+1.10%Open interest weightedexit at announcementEqual weighted exit day after: 2.10%+2.10%Equal weightedexit day afterOpen interest weighted exit day after: -0.67%-0.67%Open interest weightedexit day after

Delta-neutral at-the-money straddle returns on US single stocks, 76,848 observations, January 1996 to December 2013. Weighting by dollar open interest moves the portfolio toward the options you could actually size a position in, and most of the return goes with it.

Buying at-the-money straddles three days before an earnings announcement returned 2.60% by the announcement, and the implied volatility run-up behind it is well measured. Weight the identical portfolio by dollar open interest and the five-day version turns negative and loses significance.

+2.60%Equal-weighted straddle return, three days before to the announcement
-0.67%The five-day version weighted by dollar open interest, insignificant
+4.7 ptsRise in at-the-money implied volatility from day minus 30 to day minus 1
-0.33%The announcement day itself, equal weighted and insignificant

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