By: Tom Gentile
on April 21st, 2023
Yesterday’s article provided some base education on an options Implied Volatility (IV) and how it can move prior to an earnings announcement on the underlying.
Today we will focus our discussion on what tends to happen to an options IV post the earnings announcement and how it may dictate you closing out that open options position, win, lose or draw prior to the actual announcement.
Yesterday showed how the anticipation of a stock or ETF move prior to the earnings announcement is reflected in its options IV.
It was shown that even if the stock stays flat or even trades down a bit in price, the options IV can still increase, which can push up the price or valuation of the options premium prior to the earnings announcement.
This could be a factor that gives one confidence in hanging on to the option until the announcement is made.
The concern we want to educate everyone on is what could happen and often time does once the announcement is made.
That concern is the options IV has a habit of dropping a fair amount, sometimes a great amount once the earnings is out and that alone can adversely affect the value of the option premium regardless of what the underlying does on the announcement.
Note: If the underlying gaps up a great deal on the / after the announcement it can likely see an increase in the option because maybe the underlying gaps up or down to where the option is In the Money (ITM) by a much greater amount.
That will be the catalyst for a gain in the option well over what happens with the options IV.
The green triangle with the white letter ‘E’ in it is the date of the earnings announcement.
If the triangle is pointing up it means it beat earnings expectations and if it is pointing down it indicates an earnings miss.
We’ve boxed in the time frame to focus on to see how the IV is affected prior to the earnings announcement (the green dashed arrow slanting up) and the red, solid arrow pointing down after the announcement.
Here is a look at the 7-30 Day Options IV on the same date for the JPM April 21, 2023, $125 Call.
The next image is going to be the options implied volatility chart for that JPM April 21, 2023, $125
The date we used for education of when this option trade could have taken place, April 04, 2023, the option could have been bought to open for $5.00 per contract or $500.
After the earnings announcement look at what happened to that options IV (the red squiggly line on Figure 2 image).
Pay no mind at this point to what happened with the price of JPM. Instead notice the options IV dropped.
IV dropping like this the day of or after the earnings announcement is not uncommon.
It is a reason many options traders get discouraged trying to hold their option trade over the announcement. IV Crushes and destroys the value of the option and losses are experienced – sometimes resulting in a loss where prior to the announcement it was making money.
One might thinks this is a bad example once we show you what happened to the option after the announcement. That’s because JPM beat estimates and gapped up a large amount.
JPM gapped up to be at least 13 or more points In the Money (ITM) to that option.
That resulted in the option going from $ to at least a price that could have been sold to close at $13.00.
If one can accurately assess WHICH direction the stock or ETF IS going to go on announcement these type of trades are possible.
Its these types of gains that is the allure of trying to trade options over earnings announcements.
That doesn’t always happen, and it only takes getting wiped out when it doesn’t work out like this that will stifle ones enthusiasm for trying this any longer.
Here is an example of IV Crush on Ally Financial, Inc. (NASDAQ: ALLY)
The image shows the date of the options example for ALLY used to make this educational point. One can see on the chart above the IV started to increase as early as April 03.
Fast forward to the date of ALLY earnings, April 19, and one can see the stock ran up and closed a bit higher, than the close of the date the trade could have been opened.
The options IV sank as it tends to do and without a great deal of price action to compensate for that look what happened to the option.
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.