Anticipating Uncertainty: Straddles Around Earnings Announcements

63 Pages Posted: 21 Jan 2013 Last revised: 14 Dec 2017

See all articles by Chao Gao

Chao Gao

Australian National University, RSFAS

Yuhang Xing

Rice University

Xiaoyan Zhang

Tsinghua University - PBC School of Finance

Date Written: November 2017

Abstract

Straddles on individual stocks generally earn significantly negative returns. However, average at the money straddles from three days before an earnings announcement to the announcement date yield a highly significant 3.34% return. The positive returns on straddles indicate that investors under-estimate the magnitude of uncertainty around earnings announcements. We find positive straddle returns are more pronounced for smaller firms, firms with higher volatility, higher kurtosis, more volatile past earnings surprises and less trading volume/higher transaction costs. This suggests that when firm signals are noisy, and/or when it is costlier to trade, investors underestimate the uncertainty associated with earnings announcements.

Keywords: Uncertainty, Volatility, Straddle, Earnings Announcement

JEL Classification: G02, G11, G13

Suggested Citation

Gao, Chao and Xing, Yuhang and Zhang, Xiaoyan, Anticipating Uncertainty: Straddles Around Earnings Announcements (November 2017). Available at SSRN: https://ssrn.com/abstract=2204549 or http://dx.doi.org/10.2139/ssrn.2204549

Chao Gao

Australian National University, RSFAS ( email )

CBE Building
26C Kingsley Street
Acton, 2601
Australia

Yuhang Xing (Contact Author)

Rice University ( email )

6100 South Main Street
Houston, TX 7705-1892
United States

Xiaoyan Zhang

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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