In this market the average of the ATM straddle and strangle will give a very good indication of the stocks move on the day following its earnings report. In this current bear market, the stocks have generally stayed with the price range indicated by the options prices. One can take a look at the past historical earnings dates to get an indication of the price move. Although the current price is really independent of past prices.
The correct choice was to make the play that RIMM would be bounded by the move indicated by the ATM straddle and strangle (thinkorswim had an entire chat devouted to this topic). You could have sold short the ATM straddle, but this requires way too much margin and the risk not defined (almost unlimted risk). The more conservative play and less margin intensive play would have been to sell the OTM call and put spreads just 1 strike out from price range. Essentially this is an iron condor. The iron condor benefits from the volatlity crush the next day after the earnings report and if RIMM stayed between the price range you win.
Tyler summarizes the iron condor spread:
Although the condor was trading at $1.70 credit on Thursday, on Friday the call & put spread could have closed out for around $.02 or $.03 apiece. I would have most definately closed the spread immediately at the opening to lock in almost 100% of the gain. Holding until the end of day to eke out the last few pennies of gain would not have been wise as RIMM could have traded down below $70.
Personally I haven't played these earnings play with real money. I have tested it with a paper trade account with the Google earnings in Q109.
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