If you’ve ever wanted to use a straddle (buy a put and a call at the same strike) to take advantage of an earnings-driven price move, you’ve probably learned that once you get within a few weeks of the earnings announcement, the at-the-money options are so expensive that a move big enough to cover the cost of all that premium seems rather unlikely. What smart straddle buyers are doing is setting up their positions weeks before a company’s earnings announcement is even on your radar, then when you do get the idea to make the play (or go with a directional bet, buying just the puts or calls), they’re happy to sell you their options at ridiculously inflated prices.

Here’s an idea for getting in on the game early enough, we hope, to make a profit. Hewlett-Packard (HPQ) has scheduled its next earnings release for May 15. According to IVolatility.com, HPQ options have an established track record of implied volatility rising 30% or more going into earnings. As of this writing, you can pick up the the May 47.50 calls for about $2.25; the May 47.50 puts are selling for about $2.75 - so the net debit for the straddle would be $5.

If all goes as planned, buyers will drive up the price of our options once they start thinking about that looming May 15 announcement. As implied volatility peaks a day or two before the 15th, we would, ideally, close the position for a profit.

But have no illusions, folks - this is a speculative trade. If the IV of our HPQ options hasn’t changed by the time May rolls around, we’ll probably have lost 50% of our premium. Also, we’ll need to trade stock around this position in order to stay delta-neutral (on moves of $1 or more in either direction). Considering the risk and the effort, we strongly suggest that you use this idea just for an entertaining paper-trade - or at least analyze the risk and reward potential thoroughly yourself before putting any of your hard-earned cash on the line.