Options Implied Volatility Around Earnings Part 1

Tom Gentile

Posted in
Education

By: Tom Gentile
April 20th, 2023

3 mins read

This article will discuss a component of an options price that can affect the overall price of the option and how knowing what happens to it when a stock is coming up on its earnings can help you set yourself up for a better chance of profit.  The component is called Options Implied Volatility.

Implied Volatility (IV) is part of an options premium that approximates the future value of the option.

More education can be found online and a good place for many to start is www.investopedia.com that goes on to say the option’s current value is also taken into consideration.

The higher the options implied volatility the higher their premiums tend to be and vice versa.

My Tools Charts Implied Volatility (IV) and Options IV

What tends to happen to a stocks options IV going into that company’s earnings report date is the IV of its options tend to increase therefor seeing the premiums of the options increase.

On that knowledge alone one can anticipate an option they own prior to the  eps date will increase in what’s called an IV rush.  The IV rushes up into the earnings announcement.

Figure 1: JPM with 7-30 Day ATM IV
Figure 1: JPM with 7-30 Day ATM IV

The above image for Figure 1 is a chart on JP Morgan Chase & Co. (NYSE: JPM) on April 4.  On the chart the red line tracks the Implied Volatility (IV) for 7-30 days.

We can track longer days for IV, but since we are focusing on the ATM IV coming up on earnings and we are looking at options trades 20-30 days out this time frame for IV is what we use.

Here is a look at the 7-30 Day Options IV on the same date for the JPM April 21, 2023, $125 Call.

Figure 2: 7-30 Day Options IV for the April 21, 2023, $125 Call
Figure 2: 7-30 Day Options IV for the April 21, 2023, $125 Call

Take a look at Figure 3.  Earnings on JPM was on the 14th of April and look at what happened to the IV the closer to when earnings were to come out. It popped from 27 to 36 (as a percentile of 0 to 100).

Figure 3: JPM 7-30 Day ITM IV closer to its April 14 Earnings
Figure 3: JPM 7-30 Day ITM IV closer to its April 14 Earnings

Now look at the 7–30-day options IV closer to the earnings date.

You can see the IV increased even if the stock is not going higher IV can and does get affected regardless.

The stock dropped 2-4-points and yet the IV is increasing.

The options prices can increase as well, dramatically higher or a smaller amount, but regardless of the price of the security options IV can also result in the options IV increasing and bumping the price of the option up.

Options Price Increases Due to IV Rush

On April 4, 2023, the April 21, 2023, $125 Call option could saw a price of $5.00.  The stock price on this date was $130.

On April 11, 2023, the April 21, 2023, $125 Call option saw a price of $5.20.  The stock price on that date was $128.52, down $1.48 from the first date in the example being shown.

The point is, one usually expects an option premium to drop in price when the underlying stock goes down in price. But, with options IV increasing (Figure 4) the options still saw a slight increase in price.

Figure 4: 7-30 Day Options IV for the April 21, 2023, $125 Call Closer to Earnings
Figure 4: 7-30 Day Options IV for the April 21, 2023, $125 Call Closer to Earnings

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