Remember, a higher edge >1 is better for option sellers, a lower edge <1 is better for option buyers, and an edge close to zero indicates a fairly priced option.
Tight vertical spreads
This is the most basic strategy and the one that is used to calculate our data. One of the issues with tight vertical spreads is the fact that tight vertical spreads may not fill easily due to illiquid markets.
Normal vertical spreads
In our case, a normal vertical spread is one that has a larger distance between the strikes - it can be created by moving the long strike further away from the short strike.
Normal vertical spreads gain a larger credit, but also carry larger risks. There is also a higher chance that the stock price will end up between the two wider strikes.
Though it may be counterintuitive to sell a condor (usually used in low-volatility situations) before earnings, it still may yield profits if the market is overpricing a move. Simply compare the edge of both call and put vertical spreads to construct an iron condor.
Likewise, it may be beneficial to go long an iron condor (buy both call and put spreads) in the case that the market is underpricing a move - again, the edge provides an easy way to construct your strategy.
Straddles are not recommended by our data; a strangle is preferred.
The best strikes to enter a strangle can be easily discovered using the edge calculations - just leave out the second strike of the vertical spread.
Directional plays are enhanced with the edge just like in strangles - again, the edge allows you to pick an ideal strike price that allows you to maximize your profits.
Selling vs buying spreads
It should be noted that selling a spread and buying a spread are not completely opposite to each other. Let's say someone sells a 195-192.5 spread. In order for them to reach maximum profit, they would require the price not to drop past 195 at expiry. On the other hand, the buyer of that spread needs the price of the stock to drop to 192.5 to reach maximum profit. Therefore, that is why buying and selling the same spread may have different edge calculations.
In the advanced data section, there is a button that allows you to toggle between selling and buying the spreads.
The options market for lesser traded companies is often illiquid; this provides an opportunity depending on your strategy.
Though we try to be as accurate as possible with our calculations, sometimes there are discrepancies in the market's option prices (for example, a closer strike could be priced "cheaper" than a further out strike; obviously, if you tried to put in an order, it would never fill.) Always use limit orders when dealing with illiquid options!
Selling for low credit
You should be aware that if you sell a vertical spread with options that trade in 5 cent increments for a total credit of 15 cents or lower, you may be forced to close out your position at 5 cents. This will cut heavily into your max profit potential if you do not wish to hold until expiry.
Also, if you have a broker that charges per option leg, you may find yourself swamped with fees.
The best way to remedy this is to simply sell a wider vertical spread, which would yield a larger amount of credit.
Remaining time value
If a company reports earlier in the week, a spread may not experience a full realization of profit or loss after the earnings event. It is up to you and your strategy to decide the criteria for closing your trade.
When to close
Obviously, this depends on your strategy. However, it should be noted that during the market opens right after earnings, all stocks will experience a carryover heightened IV that will continue to decay throughout the day as the stock finds its resting price.
A good way to close your trades is to set a percentage of profit you are aiming for, and then setting a limit order at that percentage to close the trade.
Beware of high IV
Often, many beginner option traders fall for the trap of always "selling during high IV, and buying during low IV". Often, high IV may be justified on a stock, especially if its a newer company that has large swings during earnings. Always use the edge calculation to confirm whether high IV is justified by studying how the stock has behaved in the past.
Do not blindly follow edge
Edge is an extremely useful tool that allows you to find and organize good trades quickly; however, like every other indicator, it should never be followed blindly. During earnings trades, you should always conduct your own research as well as use other indicators before executing trades.