Volatility Crush Strategy - Best for Options Traders
The Volatility Crush strategy is used with stocks that typically experience relatively
low-to-moderate price moves (≤4%) following their Earnings Announcements (EA). The
basic trade idea is to sell put or call options right before the EA, collecting
a credit when options premium is very high due to elevated implied volatility (IV).
You then close the position right after the EA by buying the option back much cheaper
due to the significant drop in IV that occurs after the mystery of the EA disappears.
In assessing this trade, you need to do your homework to ensure you collect sufficient
premium to make the trade worthwhile.
This trade is practical due to the low-to-moderate price-move after the EA, which
generally won’t significantly affect the options price, unlike an “action” stock,
which experience great price moves post-EA. With these symbols, if you’re on the
right side of the price move, that’s a great thing. But if you’re on the wrong side
of the move, not so great. Consequently, by minimizing the effect of the post-EA
price move, you have a much better chance to profit from the reduction in IV without
it being ruined by a violent price move.
For this trade, open the position either (1) the night before the EA when the company
announces earnings or (2) during the EA day when it announces post-market, generally
capturing IV at or close to its peak.
For this trade, open the position either (1) the night before the EA when the company
announces earnings or (2) during the EA day when it announces post-market, generally
capturing IV at or close to its peak.
This popular stockearnings screen will give you a list of stocks which do not react
more than 4% fpost-EA. It includes only those stocks whose earnings are releasing
next day.
Screen criteria:
- Earnings Date Start Date : Current Date + 1
- Earnings Date End Date : Current Date + 1
- Predicted Move (Next Day) Max : 4%
- Options Type: Weekly
Strategy Guideline:
- Options Strategy: Sell Call and Put
- Options Strike Price: Current Stock Price – (% Predicated Move x 2)
- Expiration Date: It should generally be the closest expiry immediately after the
EA.
- Buy Insurance: Buying back Call and Put at Strike price which 10% lower than Sell
Strike Price is optional but recommended.
Watch Video for More Detail
