I must recognize that I never have thougth deeply about this question. I don't really know what maret makers are pricing when earnings are coming.
I have some questions,
What are they quoting for earnings?
They are expecting a % movement in the underlying ?
but a % movement from where? from where the underlying will be in the moment of the announcement or from where the underlying is now ?
on what information they are based ?
is that gap priced by market makers since when ? since 20 days before eranings 10 or since de first day that option exist.
i.e. MSFT earnings is this week, in 4 days, after the market close . We see that iv for options expiring the day after earnings is 38 % . The iv for options with more dte is around 23%
So we have that next week iv is 15 percentual poits higher than normal iv, that is a 65 % more iv than usual.
_ I took this quotes yesterday
1) msft 20 jl dte= 4 iv = 38 % range = +- 3,70
2) msft 27 jl dte= 4+7 iv = 28,7 % range = +- 4,32
3) msft 03 ag. dte= 4+7+7 iv = 24,82 % range = +- 4,71
The market makets are implying a gap of +- 3,70 in 4 days.
But they are implying a 0,62 move from 20 jl to 27 jl and a 0,39 move from 27 jl to 03 ag .
do you think it is correct to say that the iv from 2) and 3) are underpriced? How would you demostrate that ? by looking the range MSFT usually moves in one week.
And more, the iv for the Oct. options, with 95 dte. and which will have another earnings few days before, is only 22,28 %. And these options have implied two eranings announcements in his price.
@TheBigShort are this the kind og things you are looking for ?
Thank you.
