A report is days away. How big a move is priced, and what happens to the IV after?

Step 1 of 5 · The week's reports

Compare each priced move with the past

“Which of the largest companies report earnings this week? For each, show the move its options price for the report against the average move of its last four reports.”

The priced move here is the at-the-money straddle, a call and a put at the same strike, in the first expiry after the report, as a share of the stock: what the market charges to own a move of any size either way. Four of the week's reports:

Most are priced near their own history. MSFT stands out the other way: its options charge about two-thirds of what its last four reports delivered. That is what makes it worth a closer look, and also what makes it easy to over-read. (The expected move)

Step 2 of 5 · The term structure

Find the report in the curve

“MSFT reports Wednesday after the close. Chart its term structure and work out the move priced for the report day from the Oct 30 and Nov 6 expiries.”

Monday's options, which expire before the report, are priced at 17%; Friday's, the first after it, at 48%. The report is the difference. Since both Oct 30 and Nov 6 hold the report, their variances can be split into ordinary days and one jump, as in the SYK case: the jump comes to a one-day standard deviation of about 4.3%, the ordinary days to about 30% a year. The Oct 30 straddle, $27.68 on a $525 stock, prices the report together with the week's four ordinary sessions: 5.3%. (Term structure)

Step 3 of 5 · The past reports

Check the scan, and the moves behind its average

“Does the opportunity scan flag MSFT's earnings? Show its score and why, and how the move its options price compares with its past reports.”

The scan scores it 82 as “earnings cheap”: a report priced below the stock's past moves, the setup a long straddle is built for. Before taking the average at its word, look at what it averages. From the daily closes, the close before each report to the close after:

The last four average 8.1%, but one of them, July's 15.5%, does much of the work: the other three average 5.6%. Over eight reports the average is 7.0%, and three of the eight moved less than the 5.3% priced now. Against eight reports, MSFT's options look a little cheap; against three of the last four, about fair. An average of four is a small sample with a long tail.

Step 4 of 5 · Two trades through the crush

Price a straddle and an iron condor the day after

“Price MSFT's Oct 30 at-the-money straddle and a short Oct 30 iron condor with its short strikes about 5% out. Show each one's P/L the day after the report if the stock moves 0%, 4%, or 8% and the IV falls back to the Nov 6 expiry's level.”

The straddle buys the 525 call and put for $27.68 ($2,768). The iron condor sells the 500 put and 550 call, buys the 495 put and 555 call, and collects $2.23 ($223), risking at most about $277. On Thursday, October 29, the day after the report, with the IV cut from 47.6% to 38.3%, per contract:

This is the IV crush in dollars. With no move, the straddle loses 70% of its cost overnight: the report's premium is gone and one ordinary day is left. A 4% move, more than three of the last eight reports, still loses money. The condor is the mirror image, small gains for small moves, and near its maximum loss at 8%. Neither is “the right trade”: each is a bet on whether this report lands nearer 4% or 8%. (The IV crush, credit spreads and iron condors)

Step 5 of 5 · The edge of the data

Name what the curve cannot tell you

“What can't MSFT's term structure and its past reports tell me about this report and the IV after it?”

• Which way. The curve prices the size of a move, not its sign.
• Where the IV lands. The table assumes it falls to the Nov 6 level. It may fall further, or less, and the path after the first day is not in the curve.
• The report. Guidance, cloud growth, spending on AI: none of it is in a volatility, only how much the market disagrees about it.
• Your fill. The prices are mids, quotes are about 15 minutes delayed, and the condor's wings trade thinner than the straddle.
• Your situation. What the rest of your account holds, and how much of it you can lose.

The data narrowed “MSFT's earnings look cheap” to “about 5% is priced, the last eight reports moved 7% on average with a wide spread, and a long straddle loses most of its cost if the move is under 5%.” What to do with that is a decision the data does not make for you.

Your turn

Ask your own questions

The same path works on any symbol of the S&P 500 or the Nasdaq-100. Open the dashboard, sign in free, press @, and ask Meerkat:

• Which large caps report next week, and which are priced cheapest against their past moves?
• How much of AMZN's front-week IV is its earnings report?
• Price a strangle on GOOGL through its report, and its P/L if the IV falls to next week's level.
• Run the opportunity scan for earnings setups this week.

Sign in free and ask ↗ Open the dashboard

More case studies: a high IV percentile · deep put blocks · dealer gamma · the wheel, backtested

Click a question to copy it. Nothing on this page is investment advice; options can lose their whole value quickly.