Volatility Crush Strategy This strategy is used with stocks that typically experience relatively low-to-moderate price moves (≤4%) following their Earnings Announcements.
The Volatility Crush strategy is used with stocks that typically experience relatively low-to-moderate price moves (≤4%) following their Earnings Announcements (EA).
The basic trade idea is to sell put or call options right before the EA, collecting a credit when options premium is very high due to elevated implied volatility (IV).
You then close the position right after the EA by buying the option back much cheaper due to the significant drop in IV that occurs after the mystery of the EA disappears.
In assessing this trade, you need to do your homework to ensure you collect sufficient premium to make the trade worthwhile.
For this trade, open the position either (1) the night before the EA when the company announces earnings or (2) during the EA day when it announces post-market, generally capturing IV at or close to its peak.
This popular stockearnings screen will give you a list of stocks which do not react more than 4% post-EA. It includes only those stocks whose earnings are releasing next day.
This strategy is perfect for a stock whose price doesn’t move much following its EA.
Here’s how to trade this strategy:
1 - Sell a put or call option right before the EA of your chosen stock, when its IV is typically at or near the peak (this will get your account an instant credit for the premium the buyer pays for your option).
2. Buy back the option you sold right after the EA, when it’s (usually) much cheaper due to a big post-EA drop in IV.
IMPORTANT: You MUST make sure the stock you play tends to exhibit very low price moves following its EA.
That’s where the proprietary algorithm that generates predicted moves comes in – it ONLY shows stocks that tend to move 4% or less immediately following their EA.
And like the Volatility Rush Strategy, it also gives you a prospective date to open the trade.