Earnings & IV Crush question

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.
More...

In some cases it has happened. I noticed it with some biotechs before trial results were released.

The option premium refused to decay until very late in the cycle - based seemingly more on the probability of the news release happening before expiry.

But since IV is a function of price and time, then it will rise if prices remain unchanged (relative to the underlying) and time decreases.

IV's of 500+ were seen in some cases.
 
If the premium didn't drop while we got closer to expiration, I would define that as IV increasing.

It seems like you're alternatively interpreting the event as investors putting on a spread early and just "holding the price"... not really sure I understand that view.
 
On ERTS though, you really didn't see a "surge" in IVM leading up to earnings. I use the ivolatility numbers for looking at this.

A month ago, 30-day "IV Index" was 68.21%. A week ago, 30-day was almost constant at 65.22%. Today, it dropped to 50.08%. So, that's a really significant drop...

(For those unfamiliar with iVolatility at IVM: it's not implied volatility of any specific contract. It's like VIX; they guesstimate 30/60/90-day out by looking at the vol surface across multiple strikes/months.)

To my eyes at least, it looks pretty much the same as DIS. I guess you might have known something was coming since historical volatility for ERTS had slowly slipped lower over the last few weeks (compared to DIS)...
 
What I was trying to say is that people think that IV is going up. This is infact untrue. What is really happening is that time is passing and the straddle isnt decaying. the pricing model READS this as vol going up, when infact the position price hasnt moved. In goog for instance, the typically expect a 5% move (or so). This portion of the ATM straddle doesnt decay out until after earnings. The following day, if the stock doesnt move the entire value of this straddle prices out. I hope that clarifies.

Let me put some math out there Goog has earnings in one week, the straddle is priced 40 dollars, 15 bucks of time premium, and 25 dollars in anticipation of earnings. Leading up to earnings, the 15 bucks will decay, while the 25 dollars, wont. The model reads the 25 dollars as implied vol going up. (think about it a straddle with 25 bucks in it with 1 month to go has a lower vol than a straddle with 2 days to go). In actuallity though, vol really didnt move.
 
You must log in or register to reply here.
Back
Top