Trader Edge

Exploiting Earnings Volatility

It is earnings season again, which is one of the best times to exploit earnings-related option pricing anomalies. Option traders are savvy, but Earnings volatility is a difficult concept and it affects every option in the matrix differently.When markets move, it is very difficult for market-makers to accurately apply the unique earnings volatility adjustments across the entire matrix. This creates value-added opportunities for option traders with the right tools.

Fortunately, there is a precise framework that quantifies the exact impact of earnings volatility on the value of every option. I introduced this analytical framework in my recent book, Exploiting Earnings Volatility: An Innovative New Approach to Evaluating, Optimizing, and Trading Option Strategies to Profit from Earnings Announcements.

"Exploiting Earnings Volatility also includes two Excel spreadsheets. The Basic spreadsheet employs minimal input data to estimate current and historical earnings volatility and utilizes those estimates to forecast future levels of implied volatility around earnings announcements. The Integrated spreadsheet includes a comprehensive volatility model that simultaneously integrates and quantifies every component of real-world implied volatility, including earnings volatility. This powerful tool allows the reader to identify the precise level of over or undervaluation of every option in the matrix and to accurately forecast future option prices and option strategy profits and losses before and after earnings announcements. The Integrated spreadsheet even includes an optimization tool designed to identify the option strategy with the highest level of return per unit of risk, based on the user’s specific assumptions."

After releasing Exploiting Earnings Volatility last year, I made a breakthrough in applying these tools in my own proprietary trading. Continue reading →