Earnings Report: The Volatility Play (Short Straddle)

At the exchange we had to pick a stock and options strategy to go along with it. Here's the premise of the strategy I pitched and we went with to the group:
Wynn resorts and MGM had already came out with better than expected earnings. These companies' shares had risen dramatically the next day as a result of better than expected earnings. On July 26th, Las Vegas Sands earnings would be released. There is a historical correlation between the earnings of the three casino giants, so it seems plausible to the investing community that LVS will also beat expectations (however, yesterday Dell missed expectations, after its "peers," aka Apple beat expectations).

I believed that LVS, even if it beat expectations, would not see its stock price rise. The 26th is near the end of earnings season, and many companies had beaten expectations, if Sands DID NOT beat expectations, that would be a surprise. As such, I thought the stock would not move on the day of the 27th.

However, with an earnings report comes a great amount of uncertainty. The prices of options showed high levels of implied volatility. Stocks can move drastically after earnings, and as such options on LVS were very expensive.

Herein lies my strategy of a short straddle:
1) Sell an ATM ($46) Call for $2.43
2) Sell an ATM ($46) Put $2.01
Total credit: $4.44
If the stock goes up, I will lose on the call. If the stock goes down, I will lose on the put. But if the stock stays where it is, both options expire worthless, leaving me with the premium I collected for selling the options.

Notice how the maximum profit occurs if the stock does not move away from its current price of $46. 

On July 28th, earnings had beat expectations, risen in the aftermarket, and then moved to $45 (market was down, LVS actually did "less bad" than the rest of the market). When I sold the options, there were roughly 28 days till expiration. On July 28th, there were 25. However, to "buy back" the straddle (closing out my position), I would only have to pay $2.50 for the put, and $1.40 for the call: only costing me $3.90: A profit of $.54. This 54 cent drop in the cost of the option was not due to time decay (25 days instead of 28), but due to a drop in volatility. The market wanted to see how the earnings would play out: and the stock did exactly what I predicted - stay flat. The stock already had a better than expected earnings report calculated in the price.

The full strategy presentation can be found here: LVS Strategy Presentation. Start on slide 11.