Trading Earnings Volatility With Options

This strategy was inspired by u/mori226. The system trades options spreads (diagonals) around earnings volatility, buying when IV is lowest, selling when it is highest.

Current work-in-progress is in the embedded PDF below and includes backtest results from my prototyping in OptionStack.

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Spread Entry

1. Long: One month after earnings, buy cheap LEAP calls.
   • Entry Criteria (all must be met)
     • It’s been at least 30 days since the last earnings report
       DaysSinceLastEarnings >= 30   .
     • It’s over 30 days until the next earnings report 
       DaysUntilNextEarnings >= 30
     • IV Percentile is between 0 & 10 (per last 100 days)
       0 < IVPercentile100Day <= 10   .
   • Contract Selection
     • 300 – 400 Days till expiration
       300 < DaysTillExpiry < 400  .
     • Strike is OTM by approx 10 x 20-Day ATR
       ClosePrice + (10 * 20D ATR)
   • Allocation
     • 10% of available buying power
       
2. Short: Leading up to next earnings, sell calls to match each LEAP.
   • Entry Criteria
     • It’s less than 10 days until the next earnings report 
       DaysUntilNextEarnings <= 10
     • IV Percentile > 90 (per last 100 days)
       IVPercentile100Day > 90   .
   • Contract Selection
     • 20 – 30 Days till expiration
       20 < DaysTillExpiry < 30 
     • Strike is OTM by approx 10 x 20-Day ATR
       ClosePrice + (10 * 20D ATR)

Exits

1. Long (LEAP) Exit Criteria
   Any of these criteria can be met
   1. LEAP gains 100% return
      LEAPUnrealizedProfitPct >= 100
   2. LEAP takes 50% loss
      LEAPUnrealizedProfitPct <= -50
   3. LEAP expires within 90 days
      DaysTillExpiry <= 90 

2. Short Exit Criteria
   Any of these criteria can be met
   1. LEAP position was closed
   2. It’s been over 30 days since last earnings report
      DaysSinceLastEarnings >= 30
   3. Price crosses above the short’s strike price
      ClosePrice > ShortStrikePrice
   4. Short leg gains 50% of maximum reward
      PctReturnOfMaxReward >= 50