Selling options ahead of earnings should only be done in these circumstances: (a) you don’t mind be assigned the underlying stock (if expires in-the-money at expiration) long or short at the improved cost basis; (b) you are selling calls or puts against existing positions to improve cost basis; or (c) it is a speculative trade and you think the stock’s actual move will be LESS than the Premium received (i.e., Breakeven Points) at expiration.
Master Trader specializes in selling credit spreads around compelling patterns as an Income Trade because the time decay (a “drag” to option buyers) favors selling.
Selling options with high volatility is a plus since we “get paid more” for the risk taken; however, we rarely sell options ahead of earnings or other known news event likely to cause a significant gap since we perceive that more of a gamble. Instead, we prefer to trade options after the announcement, when the premiums are still relatively elevated.
In the video below, we will analyze three earnings gaps and whether or not sellers of options (Straddle and Strangle) — who routinely sell options into earnings on the premise that the premiums are always overpriced — were profitable or not.
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Actually, in retrospect, you see that buying puts and/or a Straddle or Strangle would have been profitable because the actual move dwarfed the expected move. However, we are not recommending that strategy either since the stock’s move must be significant enough to overcome the very high cost of the options ahead of earnings.
After earnings, we often recommend short credit spread trades in our Master Trader Weekly Options Trader, which is designed for the active trader wanting to generate weekly income from high probability short-term option selling, including news, gaps, earnings, and volatility trades around compelling chart patterns.
Feel free to post any questions in the comment section below.
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Trading the Pristine Method — Origin and End
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Chief Options Strategist
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