Option Implied Volatility After an Earnings Announcement

Tom Gentile

Posted in
Technical Analysis

By: Tom Gentile
August 16th, 2022

3 mins read

Yesterday we showed an option Implied Volatility (IV) chart on Target Corporation, (NYSE: TGT) as an example of how IV tends to rush or increase going in to a stocks earnings announcement.

The education was to be careful buying an option on a stock just before they announce as not only is there a chance the stock doesn’t go the way one expects and for the direction they need for the option to make money, but IV which is a component of options pricing could decrease (volatility crush).

If a stock gaps much higher for example the price increase will help the option even if volatility crushes.

Walmart, Inc. (NYSE: WMT) announced earnings today before the market opened and they came in better than expected. The stock gapped up 6-points higher from its previous day close.

That pop in price helped the options on WMT increase, but they probably could have increased even more than they did if it weren’t for the IV crushing. Here are before and after shots of WMT stock prior to earnings and the IV chart on a call option for WMT.

Figure 1: 90-day Candle Chart on WMT the Day Before Earnings
Figure 1: 90-day Candle Chart on WMT the Day Before Earnings

Now take a look at the IV chart the same day before:

Figure 2: At-the-Money (ATM) IV the Day Before WMT Earnings Announcement
Figure 2: At-the-Money (ATM) IV the Day Before WMT Earnings Announcement

We primarily focus on the red line, which represents the 7-30-day ATM IV.  This IV is another visual example of how IV tends to spike going in to an earnings announcement.

Volatility Crush

The next two images are going to show the stock gap higher in price the day the earnings came out (today) followed by the IV chart for the options the day the earnings came out (today).

We will reiterate the price of the stock gapped up.

This gap up in price will help the value/pricing of the option. If one picked a call option anticipating WMT to beat earnings and gap up that anticipation played out and one would have seen profits in the option.

There are times a stock can beat on eps but forecast lowered eps and or revenue in the next quarter (or more) and despite the good earnings the stock can gap down.

No matter the eps and revenue outcome and no matter the stock price move, IV tends to still crush, so you either need to risk being right or wait until after the earnings to see IV settle down so options pricing gets less expensive.

Image 21
Figure 3: 90-day Candle Chart on WMT the Day of Earnings
Figure 2: IV Chart Showing IV Crush the Day of Earnings
Figure 2: IV Chart Showing IV Crush the Day of Earnings

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