8. Buy Volatility before Earnings Announcements
Chapter 6, “Long Volatility Trades,” examined long straddle/strangle trades around earnings announcements. In those trades, straddles/strangles were bought one day before the earnings announcements and closed one day after the announcements. The purpose was to harvest volatility (i.e., large price movements) caused by the information released in earnings announcements. However, a popular strategy among options traders aims to profit from increased volatility prior to earnings announcements to avoid direct exposure to the risks related to the announcement itself. The rationale behind the strategy is that uncertainty about the news coming out of earnings announcements intensifies as the announcement ...
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