If you think that you can predict the results of the upcoming earnings, you can just buy/sell the stock or calls/puts ahead of earnings. In my opinion, earnings are 50/50. I prefer not to take any directional risk. My favorite way to play earnings is buying a strangle or a straddle a few days before earnings and selling it just before earnings are announced (or as soon as the trade produces a sufficient profit). The idea is to take advantage of the rising IV (Implied Volatility) of the options before the earnings. I described the general concept here. In general, I look for companies having a history of big post-earnings price moves. Those big moves will cause the IV to spike before earnings.
Citigroup doesn't have a history of huge post-earnings moves. However, the stock tends to be volatile before the earnings, and IV increase should keep the floor below the stock price.
C is currently trading at $34.80. The trade I'm looking at is:
- Buy C April 2012 35.0 puts
- Buy C April 2012 35.0 calls
As of this writing, the trade can be done for about $2.00.
Please note that I'm buying a straddle here, not a strangle (the puts and the calls are the same strike). The reason is to reduce the negative theta since those options are fairly close to expiration. The negative theta of the trade is currently about 3.3%. That means that, all other factors equal, the trade will be losing 3.3% per day. However, the rising IV should offset the negative theta at least partially.
The main idea behind this trade is "renting the strangle/straddle" before the earnings. An increase in IV should help to neutralize the negative theta and keep the floor under the strangle price. The main and only risk of those trades is the negative theta (time decay). If the stock moves, it should help to increase the gains.
As we know, earnings are 50/50. This is a trade for those who don't want to bet on the direction of the stock and don't want to hold through earnings.
The prices might be different when you place the trade so adjust the strikes accordingly. If you decide to place those trades, please make sure you understand what you are doing.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: I will be initiating the straddle position within the next 72 hours