Anticipating Uncertainty: Straddles Around Earnings Announcements

On average, straddles on individual stocks earn significantly negative returns: daily holding period return is -0.19% and weekly holding period return is -2.09%. In sharp contrast, straddle returns are significantly positive around earnings announcements: average at-the-money straddle returns from one day before earnings announcement to the earnings announcement date yields a highly significant 2.3% return. The positive straddle returns around earnings announcements are robust to different stock and option characteristics. Furthermore, we find the positive straddle returns are more pronounced for smaller firms, firms with less analyst coverage, higher past jump frequency, higher kurtosis and more volatile past earnings surprises. This finding suggests that when the firm’s information environment is less transparent, or when there is more noise in the firm’s signals, investors are more likely to underestimate the uncertainty around earnings announcement days.