OPEN: BIDU Short Straddle

A short straddle is a great strategy traded very close to an earnings announcement. A short straddle consists of selling a call and selling a put at the same strike. This gives you theta (time) and vega (volatility) on your side since you are selling both legs. You normally open the trade the day of the announcement when volatility is at its highest. It is high because the upcoming news typically elicits fear in the market and among shareholders. This is why you can capitalize on this by selling instead of doing a long straddle by buying a call and buying a put.

You then exit the short straddle by buying back both legs a few days after the announcement when the fear is no longer there because the news is out. Just like when news gets old, so does volatility. So, the market maker deflates it back to a normal level. This allows you to buy back the legs much cheaper than what you sold it for.

So, as you can see on BIDU's chart, earnings is tonight at 8:00pm. The stock has pushed up dramatically today causing volatility and option value to be high. So I placed this trade around 3:30pm.

Therefore I sold the Mar 250 Call for $31.00 credit & sold the Mar 250 Put for $23.15 credit giving me a total credit of $54.15! Notice how I sold the Mar options instead of Feb. Since we are right near options expiration day for Feb (2/15), I wanted to give myself a few more days in case it takes longer for volatility to drop.

My breakeven (B/E) is 250 + 54.15=294.15 & 250-54.15= 195.85 so now I have a wide range for this trade to close at in order for me to keep my credit.