Hey everybody, I’m Chris Butler from the tastylive Research Team.
We often hear the theory that buying premium on the days prior to an earnings announcement is a good strategy because of the general increase in option prices and implied volatility. But is that really the case?
To test this, we looked at four well-known stocks in the most recent earnings cycle. We calculated the expected move the market was pricing into the options on each of the five trading days prior to the earnings report. And we recorded the actual implied volatility figure observed in the earnings cycle option chain on each of these 5 days.
We found an interesting phenomenon occurring prior to earnings announcements. While it often looks like implied volatility is increasing, option prices may actually be stagnant or even decreasing. This is because the market prices options somewhat consistently on the days leading up to earnings, but doesn’t decay the options like it would under normal circumstances. When option prices remain the same, and the time until expiration decreases, implied volatility increases.
It is possible for implied volatility to increase while option prices are actually decreasing! In one example, the straddle price (and expected move) decreased by half, while implied volatility remained constant. The better gauge of option price movement would be to look at the expected move on the days prior to earnings.
For all our examples and lots more charts, click here! Be sure to check out all the great research in the show archives.
OK, hope this was interesting! I’m Chris Butler. Check out tastylive.com for much more!
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.