Post feedRecently Asked Question
I stumbled across a good question recently that was posted to the blog. I am going to throw it back to the group to see who can come up with the right answer. Here is the question:
"When does the implied volatility spike before earnings begin? For example, SPG reports monday but the CBOE chart shows IV dropping even into today and we're less than a week away."
Basically the question is two-fold. First when does implied volatility rise before earnings, and two why would it be dropping a few days before earnings?
"When does the implied volatility spike before earnings begin? For example, SPG reports monday but the CBOE chart shows IV dropping even into today and we're less than a week away."
Basically the question is two-fold. First when does implied volatility rise before earnings, and two why would it be dropping a few days before earnings?
My understanding is that I.V. is a
measurement of expectation.The price of the underlying asset may
go up, or down. Earnings can
bring a time of expectation and the
resulting price movement. If there
is a dropping of I.V there would
seem to be less of an expectation
of a big move in price, as seen by
the market makers.I have noticed
that as stock prices move up I.V
seems to go down and vice versa.
This is my understanding, I may be
off. Steve L
Posted by
Anonymous |
10/26/2006 01:33:00 PM
Spot on Steve. If you see IV dropping, then something has caused less of an expectation out of the stock. Perhaps they priced the options too high and there was a estimate revision or something that has brought expectations down.
Simple answer for a simple equation! Great work Steve!
Posted by
Option Addict |
10/26/2006 01:36:00 PM
However, I seen some stocks where IV was dropping before earnings and then exploded on bad earnings. It be wise to see how your porfolio IV behaves on earnings.
Posted by
Anonymous |
10/26/2006 02:25:00 PM
I would think that if the IV is not increasing the closer you get to an Earnings date, then the stock has already anticpated and has factored it in.
Posted by
Anonymous |
10/27/2006 11:15:00 AM