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As an options trader, I find it difficult to gain an edge when it come to high volatility events. Four of these vents occur yearly – it’s called earnings season. And ahead of this earning season, we are faced with high implied volatility – higher than usual.
Ahead of earnings season, the market usually expects an outsized move up or down. A stock that might normally moves 2-3%, can jump higher by, say, 7%.
As we enter the heart of a new earnings season, I am looking across the landscape of option prices and see many stocks are priced for a big move. This is not normal. In fact, coming into an earnings season, stock prices are often more subdued, as if the air was let out of the balloon.
High implied volatility, anyone?
Volatility often ramps up just before a company issues its report. For the most part, stock prices for this coming quarter have gone up considerably, which means the bar is set very high. One bad piece of data from a company’s report could be a devastating outcome for the stock price.
When option prices are pumped up as they are now, expect big moves – up or down. Don’t try to game a move – it is simply guessing. Even reading the stock chart correctly isn’t a guarantee. It can give you a very slight edge and help you avoid a disaster – but that’s it.
You may not see an edge before an earnings report, so why not wait until after it’s released? Yes, this means you won’t participate in an immediate move following an earnings release, but who needs the stress? With elevated implied volatility, a big move is probably already baked into an option price.
Do what I do and wait. There are always opportunities after earnings. Don’t let high implied volatility throw you around.
Big moves by Tesla and NVIDIA following recent earnings reports prove the point: You don’t have take risk prior to an event. You can enjoy a nice return by taking on a position following the news. I often find the market opens up wide for me with opportunities after the release. Traders and investors do their thing while I wait in the wings and then pounce when I am ready.
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