A stock at Rs 1,200 reports results tomorrow, and the at-the-money straddle expiring in a week costs Rs 84. Its last eight results-day moves were 5%, 3%, 9%, 4%, 6%, 2%, 7% and 4%. Buy the straddle, sell it, or sell an iron fly with wings at 1,100 and 1,300 for Rs 60?

Do not buy: the straddle prices a 7% move against a 5% average, and buying it would have lost about Rs 24 a share on average. Selling it would have earned Rs 24 on average with no cap on a surprise. The iron fly caps the loss at Rs 40, but its break-evens sit at the 5% average move, so on history it earns about Rs 1: the wings cost the whole edge. Sell premium only in a capped form, at a better credit or with cheaper, wider wings.

An umbrella seller who doubles his price on the morning of a forecast storm is pricing the rain he expects. If storms here usually bring less rain than he charges for, buying his umbrella is a poor bet and selling umbrellas alongside him is a good one, until the one storm that floods the street. A straddle at Rs 84 on a Rs 1,200 stock prices a move of about 7% by expiry; Brahmagiri's last eight results moves average 5%, about Rs 60 a share, so the straddle looks rich. Only one of the eight moves, 9%, beat 7%, and one, 7%, matched it.

At expiry the straddle is worth the size of the move in rupees: 12 rupees for each 1%. Bought at Rs 84, it would have made 24 on the 9% move, broken even on the 7% and lost on the other six, an average loss of Rs 24; sold, it would have earned that Rs 24 on average and lost Rs 24 in its worst quarter. The iron fly collects Rs 60 and its loss stops at Rs 40 once the stock is beyond a wing, so its outcomes are narrower on both sides.

Because the wings are not free. Selling the straddle collects Rs 84; buying the 1,100 put and the 1,300 call costs Rs 24, leaving Rs 60. The iron fly's break-evens are 1,140 and 1,260, a 5% move, which is the stock's average move, so on history it roughly breaks even: the Rs 24 spent on the wings is almost exactly the Rs 24 average edge from selling. What the wings buy is the floor: on a 15% surprise the short straddle loses Rs 96 a share, while the iron fly loses Rs 40.

Not the long straddle: it needs a move larger than all but one of the last eight. The edge is in selling, but a naked short straddle into results is a bet that this quarter looks like the last eight, with no limit if it does not. The defensible trade is short premium with a capped loss, sized so that the Rs 40 worst case is affordable, and only at a credit that leaves an edge: the Rs 60 iron fly does not, so the desk should ask for a better price or look at wider wings, which cost less and keep more of the Rs 84. Three limits belong in the pitch. Eight results are a small sample, and a guidance cut or a large deal can produce a move the history never showed. After results the options still have days to expiry, so closing the next morning costs a little more than the expiry values in the table. And a market pricing 7% may know something about this quarter that the history does not.