I am working on some earning trades and I am calculating jump vol as followed in this photo. However am I right in writing, jumpvol * sqrt(1/252)*stock price, to figure out how big the earnings jump will be?
I'm not going to pretend I understand what you wrote, but are you trying to calculate the implied stock move with all this? You said, "to figure out how big the earnings jump will be?" Let's say IVOL is right on the money and will predict how big the move will be, how will that help you if you do not have a process to "predict" if that expectation is under or overpriced? If options imply a 5% move, and you buy or sell a straddle or calendar etc, and you get a 5% move, that should take away any hope of making money consistently. You need the market participates to be wrong or take some risk and hope you are right. Bob
Looks like the calculation already implies daily volatilities (the sigma, seeing how T and T-1 are used as multipliers), so the jump volatility calculated is for the one-day. If that is the case, you do not need to multiply by sqrt(1/252).
Hi Bob, the expected move is just the first standard deviation of the possible moves. But does that imply just the jump or does it imply the jump + the move during the day after earnings?
I am just try to calculate the jump risk premium in the options price, not the jump + vol during the day after earnings. What should I be using for this calculation?
Rob I also have a model on what I believe it should be however I want to know what the market is predicting the jump vol to be. For example in many of the small stocks there is no gap in the morning, it opens a few points up or down and then starts its move. However there is some jump vol implied. I want to take advantage of that. Thanks again
To me jump+vol day after should be almost jump. So you are looking for jump right after earnings (like after hours or at market open?). To me it should be hardly different from jump to close of trading on the day following the release - probably about 90% of the later. When they mention implied move on earnings, from my experience, they are referring to the one-day move (close of trading before earnings to close of trading following day)
First level statistical analysis might be historical volatility data versus X days up to, including, and post earnings dates. Second level statistical analysis might be earnings day price change versus the difference of actual and consensus earnings estimates. Third level statistical analysis might be actual earnings projections based on correlation analysis of appropiate economic, industry, competitor, supplier, and company specific data with actual earnings reports. From these types of statistical analysis, you may discover useful metrics, thresholds, and indicators than can give a worthwhile edge to your trading. From reading other threads, volatility "crush" post earnings report appears to be a viable trading method to some.
I figured it out, thanks for your help. This is what I have come up with. If we look at KSS. The implied move is 3.516 which would be what you are saying. Close to Close. BUT to calculate the gap risk it is. sqrt(back month vol(52%) ^2*days to expiration(11) - front month vol (70%)^2 * days to expiration(4)/11-2. This gives us the diffuse vol. We now use the diffuse vol to calculate jump vol jump vol = sqrt(52%^2*4 - diffuse vol^2*(4-1 =3) jump vol = .80. This is an annualized number so we have to break it down. .80*sqrt(1/252)*stock price (65.47) ~= 3.2. So you are correct the jump vol is like 90% of the expected move. HOWEVER some stocks have surprisingly LOW jump vol compared to implied market move. KSS jump vol looks like a sell here as it never rarely has large gaps in the morning. Hope you found this insightful. soryy for the messy math. Once again thanks for your help