Recently 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?

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

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!

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.

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.

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  • I'm Option Addict
  • From Saratoga Springs, Utah, United States
  • I am a professional trader and an instructor for Investools. I've had relations with the markets for 9 years. Born in Concord, CA, but reside in Saratoga Springs, Utah. Father of THREE, Husband of one.
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