Earnings & IV Crush question

M

maennj

Hello there,

I have a question regarding earnings release and IV crush. I noticed that for today, DIS (Walt Disney) options IV didn't crush after yesterday's earnings release.

In the other hand, ERTS put options IV crushed -25% after yesterday's earnings.

Unfortunately, I bought ERTS straddles on lost from it. If I bought DIS, that would've been different

So my question is, what determines the IV after earnings ? What's the best strategy to use before earnings day?

Thanks
 
Quote from maennj:


So my question is, what determines the IV after earnings ? What's the best strategy to use before earnings day?

Thanks
More...

If the option IV did not surge prior to earnings, it's not gong to get crushed.

it is does move much higher, you can anticipate it will move back to normal - and quickly.

Mark
 
As Mark correctly stated, if the option IV did not surge prior to earnings, it's not gong to get crushed post release. I'd add that if there was a pre EA surge, the news release can sometimes keep IV up for a bit afterwards.

You can get a general idea of the pre earnings IV change (and a year of historical) at the IVolatility web site.

"What's the best strategy to use before earnings day" is a tough one to answer. It depends on what your chasing, your ability to find it, your risk tolerance and you ability to manage what you bite off. If you're long over priced options, you need movement to offset the IV collapse . If you're short, you need modest to no movement to capture the IV collapse. And then there are spread strategies that can be designed to moderate the risk and either chase collapse or chase movement.
 
Quote from maennj:
....DIS (Walt Disney) options IV didn't crush after yesterday's earnings release.
....What's the best strategy to use before earnings day?
More...
1) It's possible that the market is focusing on something else beyond DIS's earnings announcement. A "crush" could occur when that item is known.
2) You could buy option premium leading up to a company's earnings announcement and hope for a spike in implied volatility. You could short-sell premium immediately before the announcement and hope for the "crush". Keep in mind, you'll have winners and losers doing this. Will you be able to grind out the trades consistently and sidestep a situation like that of GOOG's April-2008 report without losing too much money on one trade? :cool:
 
Quote from nazzdack:

1) It's possible that the market is focusing on something else beyond DIS's earnings announcement. A "crush" could occur when that item is known.
:cool:
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As with biotechs, where trial results and FDA approvals may have a greater impact on stock volatility than earnings.

A few years back I engaged in earnings plays. In most cases IV contracted after the announcement. But in a few cases the inflated IV lingered for a day or more as the market digested the data and the stock was still flying around.
 
I think that often the high IV is misinterpreted. Most stocks that are going to move on earning actualy have an earnings straddle priced in that wont decay (great example: GOOG). This portion will not decay. Unfortunatly, models do not have a way to measure this earnings straddle. Therefore what you will see, is an artificially high IV, and a high theta that won't decay. Although really, the IV didnt rise.
 
Quote from option911:

I think that often the high IV is misinterpreted. Most stocks that are going to move on earning actualy have an earnings straddle priced in that wont decay (great example: GOOG). This portion will not decay. Unfortunatly, models do not have a way to measure this earnings straddle. Therefore what you will see, is an artificially high IV, and a high theta that won't decay. Although really, the IV didnt rise.
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I have no idea what you just said, but let me ask: are you saying that if you buy a GOOG straddle one day before earnings are announced and if the stock is essentially unchanged the next morning that the straddle will be unchanged?

Is that what you said?

Mark
 
Quote from donnap:

As with biotechs, where trial results and FDA approvals may have a greater impact on stock volatility than earnings.
More...
I gave up trying to option play FDA announcements beforehand because they're a wild card where all possibilities can't be covered. I also used to read the FDA web site to get release dates but that was a nightmare. What I ended up with was just trying to look for and trade the inevitable reversal after a parabolic response to the news. At least there, you know what you're dealing with :)
 
Quote from spindr0:

I gave up trying to option play FDA announcements beforehand because they're a wild card where all possibilities can't be covered. I also used to read the FDA web site to get release dates but that was a nightmare. What I ended up with was just trying to look for and trade the inevitable reversal after a parabolic response to the news. At least there, you know what you're dealing with :)
More...

Yep, that stuff was years ago for me, too.
 
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