It is common knowledge that a general practice of selling every near-term, at-the-money straddle before earnings would be a losing strategy, however, as options expert Lawrence McMillan, of McMillan Analysis Corporation, points out, there are times when these straddles can be sold.
Everyone knows that stocks can gap by huge amounts on earnings reports. Who in their right mind would want to sell such straddles? We touched on this subject in the last issue, but have since had time to complete a more rigorous study. It turns out that, at times, these straddles can be sold.
A general practice of selling every near-term, at-the-money straddle before earnings would be a losing strategy. Some time ago we proved that the average pre-earnings straddle with heavy option volume is slightly underpriced so buying all of those could profit by 8% on an annual basis. But that would entail a lot of slippage and commissions and would not be feasible. Rather, we have developed a method of isolating straddles that can be sold, with high expectations of a profit.
By Lawrence McMillan, Founder and President, McMillan Analysis Corporation