Options Implied Volatility Around Earnings Part 2

Tom Gentile

Posted in
Education

By: Tom Gentile
April 21st, 2023

5 mins read

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.

IV Crush

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.

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

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.

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

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.

Figure 3: JPM Gap up on Earnings Announcement 2023-04-14
Figure 3: JPM Gap up on Earnings Announcement 2023-04-14
Figure 4: Options Data on JPM April 21, 2023, $125 Calls on Earnings Announcement
Figure 4: Options Data on JPM April 21, 2023, $125 Calls on Earnings Announcement

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)

Figure 5: Options IV Rush and Crush on ALLY
Figure 5: Options IV Rush and Crush on 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.

Figure 6: Closing Price for ALLY May 19, 2023, $27 Call on April 11
Figure 6: Closing Price for ALLY May 19, 2023, $27 Call on April 11

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.

Figure 7: Options Data ALLY 2023-05-19, $27 Call and IV Crush Shown on IV Chart
Figure 7: Options Data ALLY 2023-05-19, $27 Call and IV Crush Shown on IV Chart
Figure 8: Options Data ALLY 2023-05-19, $27 Call and IV Crush Shown on IV Chart
Figure 8: Options Data ALLY 2023-05-19, $27 Call and IV Crush Shown on IV Chart

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