A stock reports results in five trading days. The one-week option trades at 60% implied volatility against 30% on a normal day. What move is priced for results day, and would you sell the one-week straddle or a calendar against the one-month at 38%?

The one-week option prices a results-day move of about 7.6%, against a historical typical move of about 5.3%, so the event is rich; the calendar is the better way to sell it. Selling the straddle alone collects about Rs 81 a share but loses Rs 33 on a repeat of the worst past move. The calendar keeps part of the edge, about Rs 10 on average across past moves against Rs 22 for the straddle, and cuts that worst loss to Rs 10.

A week's commute is four normal days and one day with a road closure. If you know the week's total and what a normal day takes, the closure day is whatever is left. Options work the same way, with one rule: you subtract variances, the squares of moves, never volatilities. The week's variance is 0.60 squared times 5/252, about 71.4 in units of 0.0001. Each ordinary day is 0.30 squared over 252, about 3.57, so four of them use 14.29. The remaining 57.1 belongs to results day, and its square root is a standard deviation of 7.56%. An ordinary day, for comparison, is 1.89%.

Compare like with like. The implied 7.56% is a standard deviation, so set it against the root mean square of past moves, not their plain average: the eight results give 5.34%, with a plain average of 4.89%. The option is pricing a results day about 1.4 times the size the stock has typically delivered, which is the edge a seller is paid for. The month tells the same story from another angle. Take out twenty ordinary days and the month prices the event at 6.99%, and the sixteen days after results imply only 27.8% volatility, below the stock's normal 30%. So the week is dear and the post-results month is, if anything, cheap.

The straddle costs Rs 80.85 a share, about 6.74% of the price, and the seller keeps it all only if the stock does not move. The calendar sells that straddle and buys the one-month straddle for Rs 104.82; after results, the month option still has sixteen days to run, and if its volatility settles back at 30%, its value after a large move cushions the short week. Across the eight past moves the straddle would have averaged Rs 22.2 a share and the calendar Rs 10.1, but on the 9.5% move the straddle loses Rs 33.1 against Rs 9.5 for the calendar. Paying away part of the edge to cut the worst historical loss to about a third is the trade a risk manager will sign.

State the limits. Eight results are a small sample, and a single surprise, a drug approval or a regulatory warning, can deliver a move outside anything in the history. The calendar's cushion depends on the month's volatility after results: if the news is bad enough that the month reprices to 45% rather than 30%, the long leg is worth more, but if the stock goes quiet and the month falls below 30%, the long leg loses more than modelled. Size the trade so the worst historical move, plus a margin, is a loss the book can take.