When you expect a big move from earnings but cannot predict the direction, the straddle strategy lets you profit regardless of which way the stock goes. In this guide, we will explain how to set up and trade earnings straddles effectively.
What is an Earnings Straddle?
A straddle involves buying both a call option and a put option at the same strike price and expiration date. For earnings, you typically buy the straddle before the announcement and hold through the report. You profit if the stock makes a large move in either direction.
The concept: You do not need to predict direction. You only need the stock to move more than the combined cost of both options to profit.
How the Earnings Straddle Works
The Setup
- Buy one at-the-money call option
- Buy one at-the-money put option
- Both options have the same strike price
- Both options expire shortly after earnings
Example: Basic Straddle Setup
Stock XYZ is trading at $100 and reports earnings tomorrow.
- Buy the $100 call for $5.00
- Buy the $100 put for $4.50
- Total cost: $9.50 per share ($950 per straddle)
- Breakeven points: $90.50 and $109.50
You profit if the stock moves below $90.50 or above $109.50 after earnings.
Calculating Breakeven Points
Your breakeven points are critical for evaluating a straddle:
- Upper breakeven: Strike price + total premium paid
- Lower breakeven: Strike price - total premium paid
The stock must move beyond one of these points for you to profit. The further it moves past breakeven, the more you make.
Understanding the Expected Move
The options market prices in an expected move for each stock around earnings. This expected move is implied by the straddle price. To profit, the actual move must exceed this expected move.
Calculating Expected Move
A simple formula to estimate the expected move:
Expected Move = Straddle Price x 0.85
Example: Expected Move Calculation
If the at-the-money straddle costs $10.00:
- Expected move: $10.00 x 0.85 = $8.50 (8.5%)
- The market expects the stock to move about 8.5% after earnings
- You need a move larger than this to profit
When to Use Earnings Straddles
Straddles work best in specific situations:
Good Candidates
- History of big moves: Stocks that regularly move 10%+ on earnings
- Underpriced volatility: When the expected move seems too low based on history
- Binary events: FDA decisions, major contract announcements, or guidance updates
- Sector volatility: When the entire sector is experiencing uncertainty
Poor Candidates
- Stable blue chips: Large companies with predictable earnings rarely move enough
- Already high IV: When options are already expensive, breakevens are too wide
- Low volatility sectors: Utilities and consumer staples rarely surprise
The Strangle Alternative
A strangle is similar to a straddle but uses out-of-the-money options, making it cheaper but requiring a larger move to profit.
Straddle vs Strangle Comparison
Stock trading at $100:
- Straddle: Buy $100 call + $100 put = $9.50
- Strangle: Buy $105 call + $95 put = $4.00
The strangle costs less but needs a move to $99 or $109 just to break even, versus $90.50 or $109.50 for the straddle.
Managing the Straddle Trade
Before Earnings
Most traders enter straddles 1-3 days before earnings. Entering too early means paying for time decay while waiting. Entering too late means paying peak IV prices.
After the Announcement
Exit decisions after earnings are critical:
- Big move in your favor: Take profits immediately on the winning leg
- Stock moves but not enough: Consider holding the winning leg for drift
- Stock barely moves: Close both legs to salvage remaining value
Pro tip: If the stock gaps 15% and you only need 10% to break even, close the winning side immediately. Do not wait for more because IV crush will eat your profits.
The IV Crush Challenge
The biggest obstacle for straddle traders is IV crush. After earnings, implied volatility drops dramatically because the uncertainty is resolved. This crushes option values even if the stock moves in your favor.
How IV Crush Affects Straddles
Imagine the stock moves 8% after earnings, which matches the expected move:
- Your winning option gains intrinsic value from the move
- But it loses extrinsic value from IV crush
- Your losing option loses both intrinsic and extrinsic value
- Net result: You might still lose money on the straddle
Historical Analysis: Does the Stock Beat Expectations?
Before trading straddles, analyze whether the stock historically moves more or less than the expected move:
Historical Move Analysis
Look at the last 8 quarters for Stock ABC:
- Q1: Expected 6%, Actual 9% (Beat)
- Q2: Expected 7%, Actual 5% (Miss)
- Q3: Expected 8%, Actual 12% (Beat)
- Q4: Expected 6%, Actual 4% (Miss)
If a stock consistently beats expectations, straddles have better odds of profiting.
Risk Management
Straddles can be expensive and have a low win rate. Manage risk with these guidelines:
- Position size: Limit straddles to 1-2% of your account per trade
- Win rate expectation: Even good straddle traders only win 35-45% of the time
- Larger wins needed: Your winners must be significantly larger than your losers
- Track your edge: Keep records to know if your stock selection is working
Advanced Straddle Techniques
Pre-Earnings Exit
Some traders buy straddles 1-2 weeks before earnings to capture IV expansion, then sell before the actual report to avoid IV crush.
Rolling the Winner
If one leg is profitable after earnings, you can roll it to a further expiration to capture potential drift while locking in some profit.
Legging Out
Close the losing leg immediately after earnings and hold the winning leg for continuation. This works if the stock continues trending after the initial gap.
Analyze Your Straddle Performance
Pro Trader Dashboard tracks all your options strategies including straddles. See your win rate, average profit, and which stocks give you the best straddle opportunities.
Summary
The earnings straddle is a powerful strategy when you expect a big move but cannot predict direction. Success requires finding stocks that consistently move more than expected, managing IV crush effectively, and sizing positions appropriately. Track your results and focus on stocks where historical data supports the straddle approach.
Want to explore other earnings strategies? Learn about iron condors for earnings or read our complete earnings season guide.