Visa has turned itself into a solid stock since its IPO in late 2008. V opened at $59.50 and is trading around $138 now… returning a cool 133%. The ride has been anything but steady however, the crash of 2008 and numerous regulation attempts have shaken some out of the trade, but the question remains…is IV too cheap for the week of a major catalyst like earnings?
Should one subscribe to history, the straddle has not been a profitable trade during earnings. As seen in the excel sheet below, buying the ‘at the money’ (ATM) straddle has been a loser five of the last six times…six observations because weekly options were not available prior to 5/5/11 before earnings. It is important to point out that the IV during these trades were all in line with the average, but now the IV is outside minus two standard deviations of the mean or 97.51% of the observations are above it. It may not be a prudent strategy to fade such low premium, as one may be selling into a hole. Fading the straddle is a popular trade among ‘gun slingers’, but the key variable in options, being implied volatility, may persuade one to think again…and maybe flip it as a long trade.
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