Maximize Your 2025 Earnings Surprises Profits with Straddles and Strangles Strategies

Thomas J Catalano, a Certified Financial Planner (CFP) and Registered Investment Adviser in South Carolina, founded his financial advisory firm in 2018. With extensive expertise in investments, retirement planning, insurance, and comprehensive financial strategies, Thomas offers valuable insights into option trading.

Stock prices fundamentally mirror the anticipated earnings trajectory of their underlying companies. Firms that consistently grow earnings generally see their stock prices appreciate steadily, unlike those with unpredictable earnings or losses. This dynamic explains why earnings announcements are critical indicators for investors.

Each quarter, publicly traded U.S. companies must report their earnings and sales results to the Securities and Exchange Commission (SEC). Occasionally, companies release earnings surprises—either significantly better or worse than forecasts—that cause sharp stock price movements. A positive surprise often propels the stock upward rapidly, aligning its price with improved fundamentals.

Conversely, a negative surprise can trigger a swift decline, as investors rush to sell shares of a company perceived as weakened. Both scenarios present lucrative opportunities through option strategies like the long straddle. Let's explore how this works in practice.

Key Takeaways

• Straddles and strangles involve simultaneously buying or selling call and put options with the same underlying asset and expiration date.
• Long straddles and strangles profit from significant price volatility, regardless of direction.
• Short straddles or strangles benefit when the underlying asset's price remains stable with low volatility until expiration.

Understanding the Long Straddle Strategy

A long straddle consists of purchasing a call and a put option at the same strike price and expiration month. To apply this around earnings announcements, identify the earnings date and assess the stock’s historical volatility and reaction patterns to earnings.

Stocks prone to strong earnings-driven price swings are ideal candidates. After selecting such a stock, establish a long straddle position ahead of the earnings release to capitalize on anticipated volatility.

Implementing Your Long Straddle Position

Optimal Entry Timing

Traders often initiate straddles between two to six weeks before earnings announcements. Entering earlier can capture pre-earnings price movements, while entering closer to the event benefits from rising time premiums as volatility expectations increase.

Generally, it’s best to establish the straddle before the final week leading up to earnings, as option premiums typically surge just before announcements due to anticipated market reactions.

Selecting the Right Strike Price

Choose strike prices close to the current stock price (at-the-money). For example, if a stock trades at $51, buy the 50 strike call and put. If trading at $54, select the 55 strike options. For prices between strikes, select based on your directional bias or consider a strangle—buying a call and put with different strike prices—to widen profit potential.

Choosing the Expiration Date

Pick an expiration date that allows sufficient time for the stock to move post-earnings without excessive cost. Options with longer durations include higher time premiums but reduce the impact of time decay. Avoid options with less than 30 days to expiration to minimize rapid time decay and ensure enough time to capitalize on post-earnings trends.

For instance, if initiating a straddle 14 days before earnings and planning to hold it for 14 days after, seek options expiring at least 58 days away to balance cost and time.

Real-World Example: Apollo Group 2008

On Feb 26, 2008, anticipating Apollo Group’s (Nasdaq: APOL) earnings announcement on March 27, a trader could buy a May 70 call at $5 and a May 60 put at $4.40, totaling $940 (two premiums times 100 shares each). This represents the maximum risk, though early exit post-earnings reduces this exposure.

Before earnings, the worst-case loss was about $250 if the stock price remained unchanged. However, after disappointing earnings, APOL’s stock dropped sharply, yielding an open profit of $945 the next day—nearly doubling the investment.

Conclusion

Traditional investing required predicting earnings outcomes and taking directional positions. Today, option strategies like long straddles and strangles enable traders to profit from earnings surprises without committing to a market direction. When properly timed and managed, these strategies offer attractive risk-reward profiles by exploiting anticipated volatility around earnings announcements.

Disclaimer: This content is for informational purposes only and does not constitute tax, investment, or financial advice. Investing involves risks, including potential loss of principal. Always consult a financial advisor before making investment decisions.

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