Option Strategies for Earnings Announcements: A Comprehensive, Empirical Analysis

7. Short Volatility Trades

This chapter examines short volatility trades: short straddles and strangles. Short volatility trades are bets that the underlying stock price will not move substantially (or at least not as much as suggested by the implied volatility embedded in the options). The preceding chapter demonstrated that long volatility trades were profitable only about 30% of the time and profits from the strategies were concentrated in the top 20% of trades with the largest absolute earnings announcement returns. This evidence suggests that shorting volatility might be a more profitable strategy. However, because traders rarely execute trades at the midpoint of the bid-ask spread, the actual performance of short volatility trades is not ...