By: Tom Gentile
on April 20th, 2023
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.
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.
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).
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.
App: Toms Option Tools
Market Insight articles may show images of lists of stocks meeting a variety of options parameters like Unusual Call and or Put activity or Expensive IV found on my app Toms Option Tools.
Other times I will have other charts may work to amplify my educational points.
Those options data lists, however, can be found on my app Tom’s Option Tools. Use your device to search up and download this app and get free access to the Morning Reports section of the app.
Other parts of the app are available at a premium subscription rate, but the Morning Reports Lists are yours free.
Stock and options trading has large potential rewards, but also large potential risk.
You must be aware of the risks and be willing to accept them in order to invest in the stock and options market. Do not trade with money you cannot afford to lose.
This is neither an offer to buy/sell/ or recommend a particular stock or option.
Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been actually executed, the results may have under or overcompensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with hindsight.
No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.
Disclaimer of Warranties and Liabilities Tom Gentile and TomsTradingRoom, LLC including employees, consultants, and editors (“Publisher”) cannot and do not warrant the completeness or accuracy of the content found in our areas, or its usefulness for any particular purpose.
Tom Gentile and TomsTradingRoom, LLC also make no promises that our content or the service itself will be delivered to you uninterrupted, timely, secure, or error-free. Under no circumstances will Tom Gentile and TomsTradingRoom, LLC be liable for direct, indirect, incidental, or any other type of damages resulting from your use or downloading of any content on our site.
This includes, but is in no way limited to, loss or injury caused in whole or in part by our negligence or by anything beyond our control in creating or delivering any portion of Tom Gentile and TomsTradingRoom, LLC.
You are agreeing that you bear responsibility for your own investment research and investment decisions. You also agree that Tom Gentile and TomsTradingRoom, LLC will not be liable for any I, investment decision made, or action taken by you, or others based upon reliance on news, information, or any other material published by Tom Gentile and TomsTradingRoom, LLC.
Tom Gentile and TomsTradingRoom, LLC relies on various sources of information that we believe to be accurate and reliable. However, we make no claims or representations as to the accuracy, completeness, or truth of any material contained on our site.
Tom Gentile and TomsTradingRoom, LLC are educational portals, providing content for educational and informational purposes only. Neither Tom Gentile nor TomsTradingRoom, LLC are a broker/dealer. Investors need a broker to trade stocks and options and must meet certain requirements. All securities, futures, and investments data and ideas are offered to self-directed investors. All prices in USD unless noted otherwise.
A full disclaimer can be found here: http://www.tomgentile.com/legal_disclaimers.html.