How do we modify black scholes to price earnings vol?

[blueraincap]

Volatility before earnings discussed:

• https://www.stern.nyu.edu/sites/def...raders and Volatility Information Trading.pdf
• https://research.sabanciuniv.edu/id/eprint/24514/2/volatility_spreads_and_earnings_announcements.pdf
• https://www.econstor.eu/bitstream/10419/262360/1/1813796823.pdf
  
• http://www.columbia.edu/~amm26/publication files/Vega risk and the smileJoR.pdf
• https://www.palmislandtraders.com/econ136/volatility_skew.pdf
  
• https://www.risk.net/sites/default/...t/data/risk/pdf/sponsor/bankamerica_40_42.pdf
• https://www.mit.edu/~junpan/npp.pdf
  
• https://scholarworks.umass.edu/cgi/viewcontent.cgi?article=2280&context=dissertations_2

 

[IV_Trader]

Weeklies and one point (even half point for many stocks) strikes intervals killed this game. Or at least made it very difficult.

 

[newwurldmn]

Weeklies and one point (even half point for many stocks) strikes intervals killed this game. Or at least made it very difficult.

why? I think it massively improved it

 

[IV_Trader]

why? I think it massively improved it

Large bid/ask spread.

Years ago, if XYZ was at 44, everyone was trading (long or short) 45's strike and the same expiration (3rd Friday of the month). Now the SAME volume spreads over to 42, 43.5 , 44 , etc AND different weekly expirations.

Hence, the larger bid and ask spread.

I used to trade 100 stocks per qtr but now hardly can find 20.

 

[newwurldmn]

Large bid/ask spread.

Years ago, if XYZ was at 44, everyone was trading (long or short) 45's strike and the same expiration (3rd Friday of the month). Now the SAME volume spreads over to 42, 43.5 , 44 , etc AND different weekly expirations.

Hence, the larger bid and ask spread.

I used to trade 100 stocks per qtr but now hardly can find 20.

That’s not how market makers look at the world. More refined hedging allows them to quote tighter. Volume per strike is lower because of penny increments and microstructure changes where you don’t have MM quoting massive size on the ISE in order to secure a percentage of allocation.

 

[Slow Learning Elf]

I used to trade 100 stocks per qtr but now hardly can find 20.

The idea of trading earnings vol is a known strategy, MMs are well aware and the implied vol is more efficient. Has nothing to do with the weeklies or strike intervals.

 

[tooriginal]

DO NOT indiscriminately buy calendars due to switch edge (D1/D2 vols)

What if calendars are cheaper transaction cost-wise than flies?

 

[traider]

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).

Is regular switch edge caused by vix backwardation?