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IV tends to increase the nearer you get to a stock's earnings announcement. Does this affect all expiration dates and to what extent?
For example if im looking to sell premium on longer dated options (eg: +- 60 to 100 DTE), how much of an affect does a pre-earnings IV increase have on these options in comparison to the shorter term (eg: +- 30 DTE) expirations?
I know there are earnings plays where people try to profit from either a build up in IV pre-earnings or a drop in IV following the announcement (depending on their strategy/style etc). But that is not what my goal is. My goal is longer term premium collection so im interested how affected these longer term expirations are to earnings.
For example lets say I sell premium on an option that is currently 90 DTE and earnings is scheduled for 30 days from now. Therefore when earnings comes around I will have benefited from 30 days theta decay (all things being equal in a perfect world). However at that point IV may potentially have increased due to the earnings announcement resulting in increased premiums, which would therefore reduce or eliminate any profits on my position. However following earnings there is often a volatility drop which will result in premiums once again dropping.
That is why im curious about how much of an affect earnings have on further out expirations?
Many thanks.
Diversification is the only free lunch
Can you help answer these questions from other members on NexusFi?
I do not have the answer , but it's an interesting question and you may find some research papers done on this.
In theory earnings dates should affect IV, but how much, that's the question...
On some popular stocks, like NFLX which reports tomorrow after close, IV can really skyrocket. I think at last earnings IV percentile was like at 150%. As a matter of fact, I'm planning on doing a IV play on it on Thursday after earnings are announced on Wed. after close. The IV will still be up for an hour or two after open, I will sell premium with a credit spread behind S/R created from the first hour or two of trading, and then when the IV crush comes later in the day it will suck all the value out of the options in my spread.
For example lets say I sell premium on an option that is currently 90 DTE and earnings is scheduled for 30 days from now. Therefore when earnings comes around I will have benefited from 30 days theta decay (all things being equal in a perfect world). However at that point IV may potentially have increased due to the earnings announcement resulting in increased premiums, which would therefore reduce or eliminate any profits on my position. However following earnings there is often a volatility drop which will result in premiums once again dropping.
That is correct. Since you're holding past the earnings 60 days, the vol crush after earnings should put you back in profit. But generally speaking, you sell premium when IV% is high, and buy directionals when IV% is low, and debit spreads when it's in between. You benefit from vol crush when IV is high, and when IV is low, then it rising becomes wind in your sails to increase the value of your directionals.
So in continuing to use NFLX as an example which is reporting earnings after the close today i've attached a screenshot of IV for the last 2 months for the OCT/NOV/DEC expirations.
Obviously OCT has spiked the most and the further expirations look much flatter. However looking at the IV last friday compared to today, NOV has increased about 10% and DEC has increased by about 5%. So although much smaller for the further dated options, there certainly has been a marked increase in only 3 days.
So what im busy wrapping my head around is the affect this would have on longer term premium selling (+-90DTE). It may be best to do this right before earnings when IV is highest. However if already in a trade for the last 30 days you will probably experience short term losses until either the IV drops post earnings,....or you continue holding and wait to benefit from further theta decay. Just thinking out loud here.
Does anyone know if any 'what-if' or scenario type options tools are available? Im not talking about backtesting, but rather something that allows you to enter a specific trade and then alter various parameters (DTE, IV, etc) to see how the position would be affected. I know there are products like optionvue but that's a bit out of my price range. My broker is IB so I have access to the Volatility Lab, Probability lab etc but as far as im aware none of them really allow you to run 'what-if' type scenarios on potential positions. Please correct me if there is a way to do it...
OptionsOracle can give a scenario analysis for a portfolio with stocks / options. I used it in the past to see how adding options positions would impact my portfolio. Never tried it with naked short positions though, but think it should be able to handle it.
Unfortunately I could not get it running on my new PC - there seems to be a plug-in missing, but I never spent much time trying to fix the situation. For my simple style of trading, I can just use excel.
Folks: You can use TOS and thinkback as well to simulate these trades and view IV
There are a few strategies for which i have done much research and traded with only limited success
1) Buy straddle/strangle into earnings and take it off prior to earnings (use the Vol increase)
2) Sell ICs Out of the money prior to earnings and wait for Vol crush post earnings
3) Buy Double calendars : Same concept wait for Vol crush
4) Iron Butterfly - this is what i am researching now
The 1st one: Can make little money.. safer but doesnt work all the time
I have been burnt with selling ICs on large stocks like google and for other smaller stocks not worth my time for the credit
Double calendars - tricky based on back month vol
Yeah, hard to do those ICs on stocks that traditionally move a lot on earnings. You have to go too far out to get beyond the expected move and can't get the premium a lot of times.
, but it's an interesting question and you may find some research papers done on this.