Options Prices Around Earnings

[HtownTrader]

A couple of additional newb question:

Is there a rule of thumb for about how far in advance of earnings premiums on options prices shoot up? And about how far after earnings for volatility to come back and the options to return to "normal?"

Is it usually advisable for people just starting out to not deal with the options of stocks around their earnings announcements (both before and after the announcements)?

 

[stepandfetchit]

While not really my THANG...
The times will likely be function of the underlying. Why not just plot some to observe?
If using TOS, just add IV study, which is the "30Day" IV, which is one reasonable view.

 

[OptionsOptionsOptions]

Is there a rule of thumb for about how far in advance of earnings premiums on options prices shoot up? And about how far after earnings for volatility to come back and the options to return to "normal?"

Option premiums in advance of earnings are like the tide, they don't shoot up. More like slowly ebbing and flowing.

Is it usually advisable for people just starting out to not deal with the options of stocks around their earnings announcements (both before and after the announcements)?

Any time is good for option trading.

 

[ironchef]

A couple of additional newb question:

Is there a rule of thumb for about how far in advance of earnings premiums on options prices shoot up? And about how far after earnings for volatility to come back and the options to return to "normal?"

Is it usually advisable for people just starting out to not deal with the options of stocks around their earnings announcements (both before and after the announcements)?

https://www.elitetrader.com/et/threads/my-trades.315067/

Just follow and study his trades.

 

[spindr0]

Option premium can start expanding as much as 4-6 weeks before the earnings announcement. You can see 1 year graphs of this at IVolatility (free sign up). Premium may contract back to normal right after the EA or it may take a few days to get there.

A noob should avoid options around the EA until option behavior is clearly understood and one has a strategy that deals with it.

As a simple example, some people sell short OTM puts to acquire a stock that they want to own at a lower price. Doing so just before the EA is the best time to do so since the premium will be at its highest. Again, this is predicated on wanting to own the stock as well as the premium being sufficient (income) to warrant the exposure should the put expire worthless.

More sophisticated strategies involve trading the volatility via spreads, straddles, etc.

 

[fgopc1]

A couple of additional newb question:

Is there a rule of thumb for about how far in advance of earnings premiums on options prices shoot up? And about how far after earnings for volatility to come back and the options to return to "normal?"

You can actually do this pretty accurately from some basic probability theory. Basically, earnings day is "high volatility" (3x+ a normal day) and every other day is normal. An option expiring after earnings day will have its IV be a weighted combination of "high" and normal.

So the volatility on options never really "shoots up". An option expiring after the next earnings day's IV will be higher as it has less "normal" day to buffer it. After earnings (if there are no major surprises), the option should fall to "normal" pricing.

A rough formula you can use is IV^2 = normal_days * normal_IV^2 + earnings_IV^2, where normal_days is the number of "normal trading" days between now and options expiry. As normal_days go up, the contribution of earnings_IV dampens.

So if you look at an option expiring a week after earnings day, as time marches on, you should expect, all else equal, it's volatility to keep going up until earnings happens.


(As a quick check, I validated one stock on different expiry days and this model *roughly* explained the implied volatility for ATM options).