Event-Driven Straddle Buying

By Lawrence G. McMillan

Everyone is aware of the fact that stocks gap sharply on certain news events – primarily earnings reports and, for biotechs, FDA-related news.  Other events, such as lawsuit verdicts or settlements, can cause gap moves, too.  Option traders are aware of the potential of these events, especially when the timing of the event can be determined with some certainty.  

Thus options get very expensive in advance of the event.  However, that doesn’t mean that the options should be sold.  Frequently, it is the case that the stock will gap by an amount greater than that expected by the option markets.  Recently, we have been using a new approach to earnings-related straddles.  This article will look at several ways to approach these events, and specifically at the current approach...

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