Cleveland-Cliffs (CLF.US) earnings are coming again! Options traders are positioning early to guard against sharp stock price swings.

Fool me once, shame on you; fool me twice, shame on me. For investors in Cleveland-Cliffs (CLF.US), that seems to be the refrain as the steel giant prepares to report earnings. Cleveland-Cliffs' earnings, due Oct. 19, will be in focus. Options traders are bracing. After the company reported quarterly results in July, the stock surged nearly 16% in a single dayalmost double its long-term historical average single-day move of just over 8%. Since then, traders worried about a repeat have aggressively pushed up short-term implied volatility (IV). On top of that, short interest in the stock is now near 14%, and the CEO is known for taking on the bears. He has said he likes to boil the shorts "like a frog" and that they "picked on the wrong guy." With comments like that, it's no surprise options traders are on alert for sharp swings in Cleveland-Cliffs shares. For strategic options premium sellers, this elevated short-term fear creates a rather attractive opportunity to employ a "strangle-swap" strategy. Traders or strategists sometimes call this a "double-diagonal" strategy. This structure allows traders to take advantage of the expected decline in implied volatility after earningsthe so-called "volatility crush" or "vol crush"while avoiding the unlimited risk of naked strangle selling. To execute this "strangle-swap" strategy, a trader sells a shorter-dated strangle while buying a longer-dated strangle, thereby defining the risk. The key to this trade lies in the difference in the rate of implied volatility decay between the shorter-dated November options sold and the longer-dated January options bought. Fearing a repeat of the violent move after the last quarterly report, traders are aggressively buying November options. Whether or not such a violent move actually recurs, once Cleveland-Cliffs reports on the 19th, that binary uncertainty disappears, causing November implied volatility to plungea phenomenon commonly known as a "volatility crush" or "vol crush." However, because January options have significantly more time until expiration, they are less sensitive to this immediate implied-volatility collapse and also suffer much slower time decay (theta). If Cleveland-Cliffs shares stay between $11 and $17 after earnings, this strategy's profitability will be maximized. In that case, the short November strangle will rapidly lose value. Traders can then buy back the short option legs for a small fraction of the $0.80 premium initially collected, or let them expire worthless. That way, traders can continue to hold the January 10/18 strangle at little to no cost, gaining free exposure to future stock moves through year-end. However, if Cleveland-Cliffs shares repeat or even exceed July's explosive move, this strategy will lose money. Because the $11/$17 short strike range is narrower than the $10/$18 long strike range, in the event of a sharp one-directional move, the intrinsic value of the short options will grow faster than the long options can offset in the short term.