Earnings season is one of the most anticipated times for traders. With companies reporting quarterly results, the potential for huge price swings in both directions presents an attractive opportunity. But predicting the direction of the price move can be difficult, making long strangles one of the most popular options strategies for earnings plays.

In this blog post, we’ll dive into:
✔ What a long strangle is
✔ How to trade a long strangle around earnings announcements
✔ The risks and rewards of this strategy
✔ Best practices for trading long strangles around earnings

1. What Is a Long Strangle?

A long strangle is an options strategy where you simultaneously buy both a call option and a put option on the same underlying stock, with the same expiration date but at different strike prices. The call and put options are generally bought out-of-the-money (OTM), meaning they are priced away from the current stock price.

📌 Key Features of a Long Strangle:

• Neutral strategy: The stock can move in either direction, and you’ll profit if it moves enough in either direction.
• Both Call and Put: You’re purchasing both a call and a put option, betting that the stock will have a big move, but you’re not betting on the direction.
• Out-of-the-Money: Both options are typically bought out-of-the-money to reduce upfront cost, but this also requires a bigger move to be profitable.

2. Why Trade a Long Strangle Around Earnings?

Earnings announcements often cause big price moves in a short period of time, as investors react to the company’s results, guidance, and overall market sentiment. Here’s why the long strangle strategy works well for earnings:

🔹 Large Price Movements

• Earnings results can cause massive volatility, even if the company reports an expected result.
• A stock can soar if earnings beat expectations, or it can plummet if results fall short.
• A long strangle benefits from large price movements in either direction. The more the stock moves, the greater your potential profit.

🔹 Unpredictability of Direction

• Sometimes, earnings results surprise the market in ways that traders can’t anticipate.
• A long strangle is perfect when you don’t have a strong opinion on the direction of the stock but anticipate a big move in one way or another.

🔹 Low-Cost Play

• Since you’re buying OTM options, the initial cost of the strategy (the premium you pay for the options) is typically lower than buying an at-the-money (ATM) straddle (where both the call and put options are closer to the current stock price).
• You’re only risking the premium paid, but you have the opportunity for big rewards if the stock makes a strong move.

3. How to Execute a Long Strangle Before Earnings

🔹 Step 1: Select a Stock with Earnings Coming Up

• Choose a stock that is set to announce earnings within the next few days. Earnings announcements typically happen within a narrow window, so make sure to buy options well in advance of the earnings date.
• Look for stocks with high implied volatility (IV), as these often lead to larger price moves post-earnings. However, keep in mind that high IV also means that the premiums of options will be more expensive.

🔹 Step 2: Choose Strike Prices for Your Call and Put Options

• Buy a call option at a higher strike price and a put option at a lower strike price (both OTM).
• Distance of strikes: The further the strike prices are from the current stock price, the cheaper the options will be, but the stock will need to make a larger move to make a profit.
• You want to select strike prices that give enough room for a potential big move but don’t make the options so far OTM that you risk too much premium for too little reward.

🔹 Step 3: Set a Time Frame

• You’ll typically buy options that expire after the earnings announcement.
• A good rule of thumb is to buy options that will expire a few days after the earnings report to allow for post-earnings volatility to unfold.

🔹 Step 4: Monitor and Adjust Your Position

• After earnings are announced, monitor the stock’s reaction.
• If the stock moves significantly in either direction, consider taking profits by closing your positions early.
• If the stock remains stagnant and the options lose value quickly, you might need to cut losses by exiting the position early to avoid the time decay (theta).

4. Risks and Rewards of a Long Strangle Around Earnings

🔹 Risks of a Long Strangle

• Time Decay (Theta): If the stock doesn’t move enough, the time decay on both options will work against you.
• Volatility Crush: Post-earnings, implied volatility often drops significantly, which can reduce the value of your options, even if the stock moves.
• Premium Loss: If the stock doesn’t move enough in either direction, you may lose the full premium paid for both options.

📌 Example of Risk:

• Suppose you buy a long strangle on a stock priced at $100, with the call at $110 and the put at $90.
• The stock announces earnings, but moves only to $102—you lose the entire premium paid for the options due to insufficient movement.

🔹 Rewards of a Long Strangle

• Profit from Big Moves: If the stock moves significantly in either direction, the call and/or put can become highly profitable, potentially offsetting the entire premium you paid.
• Unlimited Profit Potential: There’s no cap on how much you can make, and you can profit whether the stock goes up or down sharply.

📌 Example of Reward:

• The stock moves to $120 post-earnings. You now have the potential to profit from the $10 move in the call option (minus the premium paid), while still having the put option in case the stock continues to move.

5. Best Practices for Trading the Long Strangle Around Earnings

• Risk Management: Always be prepared to lose the entire premium paid for the options. Ensure you have a clear risk tolerance before entering the trade.
• Avoid Overexposure: Don’t put too much of your portfolio into one long strangle. These trades should be high risk, high reward, so limit exposure.
• Exit Early: If the stock moves quickly after earnings and you’ve made a solid profit, consider exiting the position early to lock in gains and avoid theta decay or a volatility crush.
• Monitor Implied Volatility: If implied volatility spikes significantly ahead of earnings, options premiums will be more expensive. After earnings, there is typically a volatility crush that can erode the value of your options, so be cautious.

Final Thoughts: Trading Long Strangles Around Earnings

The long strangle is a great strategy when you expect large price moves, but don’t have a strong opinion on the direction. Earnings reports are a prime opportunity for using this strategy, but it requires proper planning and risk management due to the potential for significant time decay and volatility crush.

🚀 Key Takeaway:
✔ If the stock moves significantly after earnings, a long strangle can result in big profits.
✔ However, without a big move in the stock, you risk losing the entire premium paid.

🔹 Have you ever traded a long strangle around earnings? Share your experiences or questions in the comments below!

Disclaimer: This article is for educational purposes only and does not constitute financial advice. Always conduct your own research before making trading decisions.