Indicators

Monday, February 25th 2019

# Estimating the Implied Volatility After Earnings

Estimating the Implied Volatility After Earnings

Free Trial
Get a free trial of ORATS trading tools by completing this quiz
Take the quiz

Summary

ORATS calculates the implied volatility (IV) after expiration and computes the most rational skew that considers the earnings effect from implied volatility of each month. The expiration dates that fall after the next quarter may have multiple earnings dates within the expiration to remove to find the ex-earnings IV. ORATS delivers an earnings report daily of upcoming earnings announcement stocks.

ORATS calculatesÂ what the implied volatility (IV) may fall to after expiration.

Consider the graph below: In blue are the actual at-the-money IVs and in red are the ORATS post earnings IV. The first three expiration dates are before earnings and have no earnings effect (see table below) but provide a good clue where ex-earnings IVs may fall.

ORATS computes the most rational skew that considers the earnings effect from implied volatility of each month. Since the earnings effect is higher the fewer days to expiration, the nearer months will lose more IV the more earnings effect there is assumed to be. Moreover, the expiration dates that fall after then next quarter may have multiple earnings dates within the expiration to remove to find the ex-earnings IV. Earning effects are solved until the best fit term structure is achieved. ORATS delivers an earnings report daily of upcoming earnings announcement stocks.

The procedure is to create an earnings effect for each month, net it against the ATM IV and draw a curve through the points minimizing the error between the points and the drawn curve.

Notice the first expiration month after earnings announcement, 8/17/18. The prior ATM IV is 18.0% and then rises abruptly to 24.7%. ORATS solves for the earnings effect for 8/17/18 of 5.9% and if you remove that effect to the IV of 24.7% you get 18.7% Post IV column that represents the predicted IV after earnings.

You might notice that there is a slight rise in the red solved line in the graph of the Post IV. That is the subject of another post on breaking down term structure.

Disclaimer:

The opinions and ideas presented herein are for informational and educational purposes only and should not be construed to represent trading or investment advice tailored to your investment objectives. You should not rely solely on any content herein and we strongly encourage you to discuss any trades or investments with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. Option trading and investing involves risk and is not suitable for all investors.

All opinions are based upon information and systems considered reliable, but we do not warrant the completeness or accuracy, and such information should not be relied upon as such. We are under no obligation to update or correct any information herein. All statements and opinions are subject to change without notice.

Past performance is not indicative of future results. We do not, will not and cannot guarantee any specific outcome or profit. All traders and investors must be aware of the real risk of loss in following any strategy or investment discussed herein.

Owners, employees, directors, shareholders, officers, agents or representatives of ORATS may have interests or positions in securities of any company profiled herein. Specifically, such individuals or entities may buy or sell positions, and may or may not follow the information provided herein. Some or all of the positions may have been acquired prior to the publication of such information, and such positions may increase or decrease at any time. Any opinions expressed and/or information are statements of judgment as of the date of publication only.

Commissions, fees and other costs associated with investing or trading may vary from broker to broker. All investors and traders are advised to speak with their stock broker or investment adviser about these costs. Be aware that certain trades that may be profitable for some may not be profitable for others, after taking into account these costs. In certain markets, investors and traders may not always be able to buy or sell a position at the price discussed, and consequently not be able to take advantage of certain trades discussed herein.

Free Trial
Get a free trial of ORATS trading tools by completing this quiz
Take the quiz
ORATS University
Master the art of options
Research
Implementation
Risk
Review