Long Straddle

Straddles are expensive because you're buying two at-the-money options, each with significant time value. ATM options have the most extrinsic value. However, this cost gives you the advantage of profiting regardless of direction - you're essentially buying insurance against being wrong about direction.

Yes, long straddles are permitted in TFSAs because they only involve buying options, not selling them. This makes them suitable for registered accounts. Any profits from successful straddles are tax-free in a TFSA.

Research historical moves around similar catalysts. If the stock typically moves 10% around earnings but the straddle implies an 8% move, there's potential edge. Also calculate breakevens before entering - if a 12% move is needed and the stock has never moved that much, reconsider.

ATM strikes have the highest gamma and most sensitivity to movement, making them standard for straddles. However, if you have a slight directional bias, you might shift the strike slightly. If options are illiquid at ATM, the nearest liquid strike is acceptable.

If the stock stays at or near the strike price through expiration, you'll experience maximum loss - the full premium paid. Both options will expire worthless. This is why catalysts are important; without an event to drive movement, time decay will erode your position.

It depends on your thesis. Exiting before captures IV expansion (the premium increase leading into earnings) but misses the actual move. Holding through captures the move but faces IV crush. A hybrid approach (sell half before, hold half through) balances both. Analyze historical expectancy for each approach.

IV crush is the rapid drop in implied volatility after an anticipated event. Before earnings, IV is elevated; after, it collapses 20-50%. Even if the stock moves your direction, IV crush can cause losses. Manage by: exiting before the event, holding only if expecting exceptional move, or using the hybrid exit approach.

Use the rule: Expected Move ≈ Straddle Price × 0.85. If a $50 stock has a $4 ATM straddle, expected move is ~$3.40 or 6.8%. Compare this to historical moves around similar catalysts. If the stock historically moves 10%+, the straddle may be underpriced.

Consider a strangle when: the ATM straddle is very expensive, you expect a very large move that makes wider breakevens acceptable, or liquidity is better at OTM strikes. Strangles cost less but require larger moves. If you have a slight directional bias, a strangle can also express that view.

Legging out means closing one side while keeping the other. Typically, if one leg has doubled in value (2x), you might close it to lock in profits while keeping the losing leg as a cheap lottery ticket. Risk: if the stock reverses, you've closed the winner too early. Benefit: guaranteed profits plus remaining upside.

Gamma scalping involves trading the underlying to capture realized volatility. As the stock rallies, your delta becomes positive - short some shares to neutralize. When the stock dips, delta becomes negative - buy back shares. Each round trip captures profit if realized vol exceeds implied vol. Requires active management and incurs transaction costs.

Examine three dimensions: 1) Term structure - is there a kink/elevation at the event expiration indicating event premium? 2) Skew - is put IV much higher than call IV, suggesting directional fear? 3) Smile curvature - how does IV change across strikes? Compare to historical patterns around similar events to identify anomalies.

Vanna links delta changes to IV changes. In volatile markets with rising IV: call vanna is positive (delta increases) and put vanna is negative (delta becomes less negative). This can amplify directional exposure. Monitor vanna to understand how IV movements will affect your net delta and adjust hedging accordingly.

Diversify across uncorrelated catalysts (different sectors, event types). Track aggregate portfolio theta (daily decay cost), vega (IV exposure), and gamma (movement sensitivity). Target specific Greek exposures based on volatility regime - more gamma exposure in low vol, less in high vol. Use performance attribution to optimize.

Build a database of historical earnings moves vs. implied moves. Calculate historical expectancy (how often actual > expected). Only trade stocks with positive historical expectancy. Enter 5-7 days before earnings when IV expansion is beginning but not complete. Exit within 1 day after announcement. Size based on Kelly fraction of historical win rate.