Earnings Announcements and Option Volatility
Adam Warner over at Daily Options Report discusses how volatility collapses after earnings reports and how that affects options pricing. That is, you might have purchased puts expecting a drop in a stock price. You were correct in that the stock price did fall; however, you lost on your puts because the volatility collapsed. It usually just takes one or two experiences to learn this painful, but powerful lesson.
Knowing that volatility collapses after an earnings release, you can use that information to determine how much the stock is expected to move. You know the prior volatility before the earnings run up. You know the current volatility. In his article Serious Yahoo, Adam walks you through how to estimate an earnings move in the stock price.
If you use options at all, you need to understand how earnings announcements affect volatility.
My photograph of the Banff with Cascade Mountain in the background is hosted at Flickr. This picture was taken at the end of Banff Avenue near the Administration Building. If you click on the picture, you will be taken to my Flickr account where you can see more pictures.
