It is earning time and I want to buy an option spread, what do I do and what should I expect if my call and pu

Question

t strike price targets are equally spaced between the actual price at present? I know I have to buy in batches of 100. What else should I look for?

Answer 1

If I understand you correctly you are asking about buying a "strangle" before earnings. (A long strangle is a long out-of-the-money put and a long out-of-the-money call.)

In general, you can expect implied volatility (IV) to decline sharply after earnings come out. This decline in IV causes the extrinsic value of the near-term options to decline.

This means that unless the value of the underlying stock moves sharply, the straddle will probably lose money. However, your maximum loss is limited while the maximum gain possible is, in theory, unlimited. Huge percentage gains are unusual, but certainly possible.

Addendum:

Upon rereading the question I wanted to add a a quick note to make sure you understand can buy and sell any number of contracts at a time, not batches of 100. Each contract represents is for 100 shares, so if you bought 100 call contracts at $0.20 it would cost you $2,000 for the right to buy 10,000 shares.

You probably already understood this, but because of the way your qustion was worded I wanted to make sure.

Answer 2

Bullish or bearish? You can sell or buy a spread. Lots of ways and "options" to play with. Go to Yahoo finance page. Click on options link at left hand side of page. Go to options message board and read previous posts for info. Then ask more specific question.

Answer 3

There are many option strategies you can use in such a situation and will take tens of thousands of words to fully explain. I wrote a page explaining each of these at http://www.optiontradingpedia.com/free_option_strategies.htm ... for this and all your option trading questions, I hope it helps.