DATE: August 05, 2013
Should an investor purchase a Straddle during earnings week?
If a trader has a strong market outlook that a pending earnings announcement will cause a particular stock to rise or fall, and is willing to take the risk of being wrong, then, yes, buying a straddle is a logical choice. However, it is also understood that if a trader does not believe that a stock price move is likely, then buying a straddle is not a logical choice.
Pending earnings announcements are highly publicized in advance and well known in the marketplace. Therefore, there are many traders who are looking at the straddle strategy. Some of these traders are straddle buyers who are predicting a large stock price move. Other traders are straddle sellers who are predicting little or no stock price change.
A trader can increase their knowledge by studying how a particular stock has behaved after previous earnings announcements, and compare the current price of a straddle to what straddle prices were before previous earnings reports. But, of course, there is no guarantee that what happened in the past will happen again in the future. So, buying a straddle during earnings week involves considerable risk. To learn more about buying a straddle during earnings week, view this segment of "Ask the Institute."