It is earnings season and we are seeing increased option prices in stocks as companies approach their announcement dates.

Implied volatility, or IV, drives option prices. So when IV begins to rise the option market is suggesting uncertainty. A rise in IV offers either an opportunity to buy or sell options. It’s up to the investor to determine his best strategy when this occurs.

Let’s look at the stock Informatica Corp. (NASDAQ: INFA). The provider of enterprise data software and services is set to release its earnings this Thursday, April 21 after the market close. With a closing price of $51.56 on Monday, we would consider buying an out-of-the-money put spread in May as we anticipate a move lower in the stock. INFA is now near its 52-week high of $53 and change and earnings may be short of expectations.

The investor could (using Monday’s closing prices) buy the INFA May 50 Put for 1.90 and sell the INFA May 47.5 Put for 1.00 for a total debit of $0.90.

The breakeven price for the trade is $49.10 in the stock. That is — May 50 P – $0.90 debit = $49.10. The investor profits if the stock moves below $49.10 by May expiration.

The maximum gain for the spread is $1.60, which is the 2.50 difference between the two strike prices minus the .90 debit. That $1.60 is a return of 64%. The maximum loss is the $0.90 price for the put spread.

Stutland Equities is a premier futures and options trading company on the Chicago Board Options Exchange. Founded in 2005 and headquartered in Chicago, Stutland Equities specializes in volatility arbitrage across multiple asset classes.