Riding the IV Ramp Before Earnings


Updated: Mar 10th, 2017 | Vance Harwood | @6_Figure_Invest

One of the options strategies Jeffery Augen discusses in his excellent book, “The Volatility Edge in Options Trading” takes advantage of the typical ramp up in option’s implied volatility (IV) before an earnings announcements.   Upcoming announcements create uncertainty, and the option market prices that in by increasing the premiums—which is reflected in the IV of the options.   This ramp up in IV can be surprisingly high.   The chart below from Schwab’s StreetSmart Edge®, shows a two year history of AMZN with the average IV of its call options shown below.

AMZN StreetSmart Edge


You can see how average IVs in the high twenties have ramped up into the 150s right before Amazon’s earnings announcements.In order to take advantage of this, Augen suggests a long strangle position, created a few days before the IV ramp really gets going.   Normally I hate being long options because of the time decay factor (theta), but in this case the IV ramp up at least partially offsets these losses.  Ideally the options used should expire quickly after the earnings announcement—the CBOE’s WEEKLYSSM  options are well suited for this strategy.

In this case Amazon’s earnings announcement was scheduled for January 29, 2013 so the weekly options expiring on February 1st were a great fit.  These options started trading Thursday the 24th.

Thursday the 24th, Amazon was trading around 275 and the weekly options opened up trading with IVs in the high 50s.   I bought S285 calls and S265 puts to bracket the trading price with a 3.5% offset for a net cost of 11.5.   The delta on these options was +-30 at the time  (a 1 point move in AMZN should move their price by .3), so at inception the trade was delta neutral.

Some sort of directional movement before the earnings announcement is needed to make this strategy profitable.  If the stock stays right around the centerpoint (275 in this case) the rise in IV will probably not be enough to offset the carry costs, however if the stock moves a few percent either way the combination of rising IV and premium as it approaches a strike price should generate a good profit.

On Friday the 25th Amazon made a 3% move up to 283.  I held on over the weekend hoping the upswing would continue, but the stock started to retrace so I sold out at 15.0—for a 30% profit.



Friday, March 10th, 2017 | Vance Harwood
  • Olivesalad

    did this work before?

  • Rodolfo

    Thanks Vance, a nice simple strategy correctly explained.
    Rodolfo

  • vance3h

    Hi,
    I did an AAPL 485 put / 560 call recently for a debit of 13.5. It went as high as 21, but then the stock moved back toward the middle of the range. I sold at 14.5. This time I’m targeting a 30% to 50% profit. The run-up in IV on AMZN has historically been higher than AAPLs. We’ll see.

    — Vance

  • vance3h

    Hi Rodolfo,
    Thanks. It will be interesting to see how often this strategy is profitable. Unless the stock swings a lot I don’t think it will generate big profits.

    — Vance

  • Olivesalad

     thanks Vance. so does the highest volatility for Amzn occur right before 4pm next tuesday?

  • vance3h

    Hi,
    Unfortunately I don’t have historic intraday IV data My guess is that the IV will jump to near its final value at open on Tuesday–compensating for the heavy theta losses the night before. I still think this is basically a directional trade, with the IV boost somewhat compensating for theta losses.

    — Vance

  • Olivesalad

    hi vance, i was able to open a straddle and sold it for a 5% profit overnight. 

  • vance3h

    Hi Olivesalad, Glad it worked out for you. I’m still in at a small loss. The IV keeps climbing, but not enough directional movement to be profitable.

    — Vance