Investing Around Earnings Announcements: An Options-based Trading Strategy

Open Access
Ebeling, Brandon M
Area of Honors:
Bachelor of Science
Document Type:
Thesis Supervisors:
  • James Alan Miles, Thesis Supervisor
  • James Alan Miles, Honors Advisor
  • Timothy T Simin, Faculty Reader
  • finance
  • earnings announcement
  • options
  • straddle
  • strangle
  • PEAD
  • Post earnings announcement drift
This paper examines whether an investor can earn positive returns using either straddle or strangle options around earnings announcements. The goal of my research is to examine whether, on average, a portfolio built of either strangle options or straddle options will be profitable around earnings announcements and if so, do the underlying equity prices move enough to make the cheaper, strangle options more profitable than the straddle options. The study examines if it’s possible to take advantage of the volatility brought about by the well-documented phenomenon of post-earnings announcement drift by using a trading strategy that specifically profits from volatility. This paper is an extension of a paper written by James Grap in which he studied the efficiency of the market using straddle options around earnings announcements. The results of this study show that investors can realize an economically significant return by investing in both straddle and strangle options twenty-eight days prior to a firm’s earnings announcement. 62.5% of the straddle options and 70.8% of the strangle options in this study were profitable, returning a mean peak return of 27.1% and 29.9% respectively. However, when treated as a portfolio of options, neither the straddle option portfolio nor the strangle option portfolio reached a profitable level over the ninety day holding period. This was due to the short period of profitability for the individual options and the inconsistency of how many days after an earnings announcement the options became profitable. The results of this study also show that no significant conclusion can be made that either a straddle option or a strangle option is more profitable when investing around earnings announcements. Although a larger percentage of strangle options proved to be profitable and the mean peak return of the strangle options was higher than the straddle options, more than half of the straddle options realized a higher return than their strangle option equivalents.