Earnings Season Options Pay Big: Straddles Surge 45%

An options strategy betting on significant stock movements around corporate results has seen unusual success this earnings season. Buying straddles, a combination of put and call options, has delivered an average return of 45% for U.S. companies reporting over the last four weeks. This performance is a substantial increase compared to the 2% average return observed across the preceding 12 quarters. Traders utilize straddles to profit from large price swings post-earnings, without predicting the direction.

Several factors may have contributed to this favorable outcome. Expectations for stock volatility were generally subdued at the year's start, reflected in the Cboe Volatility Index hovering near multi-month lows. This environment likely made it cheaper for investors to place bets on heightened stock movements. Additionally, a high percentage of companies, 75.4% among S&P 500 constituents reporting by February 12, have beaten analysts' expectations, leading to notable price reactions for stocks like Microsoft and Meta.