I met someone who signed up for an options course. The strategy that course taught was buying straddles ahead of earnings reports. There was a system, some software, and trading tactics, and of course a hefty fee. I don't know if RIMM Research in Motion met their criteria for a trade. However, it does illustrate the risk of buying straddles. Three months ago (chart), RIMM had great earnings and rose over 20% after the report. Tonight RIMM earnings look like a non-event. Non-events are death to straddle buyers.
The CBOE (quote) shows bid of 7.6 and 6.9 for the Oct 100s, or 14.50 for the Oct 100 straddle on RIMM before the report. That means the stock has to move more than 15% up or down for the straddle to be profitable at expiration. With the report out, the straddle is likely to lose more than half its value tomorrow, because the price movement is likely to be small.
Those buying the straddle, were hoping for a repeat of last quarter's stellar performance, or a terrible miss. The ads for the seminars probably said something about making money whether the stock goes up or down. Readers known that unchanged is a good thing for option sellers. As the song lyrics go, "Time is on my side, yes it is."
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