Further Thoughts on “Earnings” Straddles

By Lawrence G. McMillan

We have been operating an event-driven straddle buying strategy in advance of earnings for several months now, with mostly favorable results.  However, this week something happened that we haven’t seen before: the straddles increased greatly in value before the earnings were announced.

Take Amazon (AMZN) as an example.  When we published the recommendation in last week’s Hotline, we merely said to “buy the July (24th) straddle using the nearest strike.”  That’s how we’ve normally been stating these recommendation, but we may need to alter that.

The AMZN recommendation was based on data shown in Table 1 below.  The current straddle was priced at 7.16% of the price of AMZN.  Specifically, the straddle cost 34.30 and the stock was trading at 479, using closing prices on July 16th.   The straddle was to be bought on the afternoon of July 23rd, just prior to the earnings which were to be announced after the close that day...

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