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I often tell my students NOT to play earnings plays. Especially when the play is a delta neutral trade and the trader is selling premium. Mostly because markets are really efficient when it comes to price movement. Take GOOG which announced earrings after the bell. Here is an afterhour’s quote:
The stock is up over thirty-five dollars. But, for those of you who think there was some edge in buying OR selling options, take a look:
The 560 straddle expiring tomorrow (a great measure for the markets expected movement on GOOG earnings) went out almost exactly 35.00! That is an efficient market. The reason I do not advise selling delta neutral into earnings is that in the cases where markets are wrong about expected movement via a straddle price it is NOT typically the stock moving less than expected, it is usually the stock moving MORE than the trader expects. I have seen more disasters in earnings premium sales than just about any other play. If the above straddle ends up losing, it is going to be from the short side (would not be shocked to see Google run above 600 tomorrow).
The best earnings plays are those that follow the smart paper, and pick the right direction. Not always easy, but doable (see the last webinar Steven Place and I put on where we did a RIMM play that killed it).
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Graphs from LiveVolPro
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