How do we modify black scholes to price earnings vol?

[traider]

What are some common approaches?

 

[destriero]

You don't.

 

[ajacobson]

Dest is spot on. You don't modify the model, you use the model to "discover" the vol.

 

[destriero]

Look at any dbase utility on front ends like TOS or CBOE's LiveVol which has an earnings tab which dials the pre-post report RV and implied. DO NOT indiscriminately buy calendars due to switch edge (D1/D2 vols).

 

[Overnight]

FairPut™ part deux?

 

[Quanto]

People wrongly think BSM uses a constant IV.
Yes, it does, but you can simply recompute daily using an updated IV that you believe is the most probable for the expiration date....
Voila! IV is no more constant...

 

[Quanto]

FairPut™ part deux?

What is FairPut?
A "fair" Put?
Why? What's unfair or wrong with the normal Put?

 

[Slow Learning Elf]

AfairPut (c)

 

[traider]

Put another way are all strikes affected in a similar way by earnings vol, it feels that ATM strikes are more affected as time shortens till the event occurs

 

[Slow Learning Elf]

Put another way are all strikes affected in a similar way by earnings vol, it feels that ATM strikes are more affected as time shortens till the event occurs

No, you can get all sort of bizarre looking implied vol profiles across the strikes (like the "W"). But the idea is to still use black scholes implied and combine it with some vol expectation analysis.