Tuesday, February 3, 2009

Straddles Report for the Week of January 26 to January 30

During the week of January 26 to January 30 we followed 195 stocks which reported earnings during the week. The premise was that, with so much market uncertainty, earnings would suffer wild fluctuations making the conditions ideal for straddles. In addition, we expected most of these earnings surprises to be negative given the state of the US and global economy..

That is very much what happened. Below you will see the results.

Top Performers

These are the best straddle performers in terms of ROI (Return of Investment):

The top performer is a strangle on AMZN with a ROI of 168% (i.e., 2.68X the original investment). This does not mean that it was the best possible deal. In fact, many others were possible, and many more were actually more profitable. The farther away the strikes chosen in a strangle are from the current price of the underlying, the higher the gains, but the higher the risks. For example, EK is now trading at $4.50. A Strangle 5-10 would have yielded much higher returns. The 5 puts went up from $0.13 to over $0.85, that is over 6.5X (550%):

Bottom Performers

But what about the stocks that did not move after earnings were reported? We also look at the bottom of the table, searching for the worst possible performers:

As you can see there are some losses there, but interestingly there are also some minor gains. The maximum loss above was about 15%. Note also that MMM is listed three times. This shows that although you could have taken a loss if you sold the puts in a hurry, you could also have waited a little and then actually make a profit. So this may work in cases where the earnings did not surprise.

Again, this does not mean that this is the worst possible scenario as each stock moves individually and many factors affect the prices. For example, take a look at AMGN and OXY. Although they moved between 3 and 4%, an investor could have suffered losses.


The table below shows the results for the top performers in terms of move achieved versus move required. An interesting result is that straddles were profitable with only a fraction of maximum move required. This is because there were still over 3 weeks left until options expiration and there was considerable value left in the premiums, value which will be eroded with time decay.

(please click on images to enlarge)

We also looked for specific thresholds that would indicate what percentage of the max move was required to achieve profits. This varies stock by stock basis. Please see some results below.

(please click on images to enlarge)

A ball park figure is that 40-50% of the max moves was enough to attain profits. In some cases this was lower. Once, again, these figure relate to options that had more than 3 weeks to expiry. Expiry is February 20, a long ways to go.

Here you can view the entire results order by move achieved.


To view how the options on individual stocks performed after earnings, please click on each image below.






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