Earnings Implied move

[Kevin Schmit]

The straddle is 8.90 mid. After earnings the vol usually drops to ~27% meaning the straddle will be worth ~ 7.40....8.90 - 7.40 = 1.50 expected move tomorrow.

??? WFT? Where did you get this calculation?

To estimate expected earnings move solely from current IV, estimated base IV, TTE, and time-to-announcement, follow these steps:
1) convert to vols to vars for easier math
2) multiply and subtract for instantaneous earnings var
3) convert earnings var back to earnings vol (sqrt)
4) to get the expected log move multiply the earnings vol by 0.79
5) use exp() function to convert expected log move to $

multiply earnings vol by 0.68 for expected median log move

The monthly cost of a Bloomberg terminal is being wasted at your current level of market knowledge.

 

[SillyWilly]

??? WFT? Where did you get this calculation?

To estimate expected earnings move solely from current IV, estimated base IV, TTE, and time-to-announcement, follow these steps:
1) convert to vols to vars for easier math
2) multiply and subtract for instantaneous earnings var
3) convert earnings var back to earnings vol (sqrt)
4) to get the expected log move multiply the earnings vol by 0.79
5) use exp() function to convert expected log move to $

multiply earnings vol by 0.68 for expected median log move

The monthly cost of a Bloomberg terminal is being wasted at your current level of market knowledge.

Aww c'mon Kevin, cut me some slack here. It's not my personal 1. Just here in the office for the advisors to use. Thanks for clarifying that for me.

 

[Kevin Schmit]

...traditional formula uses 1/365 for time, I've used 1/252....The results here would be ... a 20%+ difference

Tom, your intuition here is completely wrong. Time in BSM is expressed as fraction of one year, and (ignoring rates and divs) scaled by sqrt. 18 days from now includes two weekends and no exchange holidays, so 14 trading days. ATM straddle price is about 0.79 times root-time-vol, so price varies with root time. In this case the percentage is about +6% ( sqrt(14/252)/sqrt(18/365) - 1 = 0.061387 ). The largest deviation for 18 days would occur if there where three weekends and two holidays (it would have to span Christmas and New Years in a year when they were on weekdays) would be a negative 20%. For 18 day periods spanning three weekends, the difference would be about -2%.

 

[JackRab]

The expected 1 day move is 5.67. BUT the IV for the straddle is 32%.... so we have .32*sqrt(1/365)*155.50 = 2.60.

How do you get to 5.67?

 

[tommcginnis]

Tom, your intuition here is completely wrong. Time in BSM is expressed as fraction of one year, and (ignoring rates and divs) scaled by sqrt. 18 days from now includes two weekends and no exchange holidays, so 14 trading days. ATM straddle price is about 0.79 times root-time-vol, so price varies with root time. In this case the percentage is about +6% ( sqrt(14/252)/sqrt(18/365) - 1 = 0.061387 ). The largest deviation for 18 days would occur if there where three weekends and two holidays (it would have to span Christmas and New Years in a year when they were on weekdays) would be a negative 20%. For 18 day periods spanning three weekends, the difference would be about -2%.

Thanks for the calculations, but I made no mistake in my post.
The OP quoted a 1-day move.
I quoted my experience with regard to a 365-day-year or 252-day-year, and take no position on straddle/strangle prices/methods.

 

[JackRab]

My 2 cents.

Forward vol between MAY18 and JUN15 is about 27... So I guess that's where the front month vol will drop to... probably lower though.... but let's take 27 for after earnings IV.

So a current straddle of 8.90 would need to be break even after earnings for the vol to be priced correctly. A 2.60 move isn't going to cut it.... and it's definitely not 1.50 expected.

Depending on skew etc... but with after event ATM IV of 27, break even would be up 5.20 or down about 7.00...

EDIT. I definitely think the after earnings vol should be lower than 27... so that would mean the implied move would have to be somewhat bigger. It's about the same if I do a similar calculation for the June options....

 

[SillyWilly]

How do you get to 5.67?

This was 5.7 earlier today

 

[JackRab]

View attachment 185459

This was 5.7 earlier today

How is that calculated? I'm more interested in the technicals behind it... I'd rather not rely on stuff that my broker provides...

 

[SillyWilly]

How is that calculated? I'm more interested in the technicals behind it... I'd rather not rely on stuff that my broker provides...

That was what i was trying to figure out because it was not making sense to me!!. Kevin did a good job of explaining it a few posts back after ridiculing me.

 

[SillyWilly]

My 2 cents.

Forward vol between MAY18 and JUN15 is about 27... So I guess that's where the front month vol will drop to... probably lower though.... but let's take 27 for after earnings IV.

So a current straddle of 8.90 would need to be break even after earnings for the vol to be priced correctly. A 2.60 move isn't going to cut it.... and it's definitely not 1.50 expected.

Depending on skew etc... but with after event ATM IV of 27, break even would be up 5.20 or down about 7.00...

EDIT. I definitely think the after earnings vol should be lower than 27... so that would mean the implied move would have to be somewhat bigger. It's about the same if I do a similar calculation for the June options....

Your posts are always insightful