Pre Earnings Implied Volatility Increases

Discussion in 'Options' started by rivercode, Aug 9, 2008.

  1. Hi,

    So it is well known that IV will rise significantly before earnings and then "crash" after the earnings anouncement.

    But the challenge becomes how do you take advantage of this ? What strategy can you use to get a good theoretical and practical edge ? The key here being a practical edge that takes into consideration what the market does. For example, you will hear buy a near term ATM and sell the longer term ATM...go ahead and model this and then you will see why the markets are efficient. Another idea is to do a pairs trade, eg. INTC/AMD or against an index like SMH...does not really work in practice. For example, with the INTC/SMH pair...the IV of the SMH almost increases at the same rate as INTC during INTC pre-earnings periods.

    So my Q is simple...what can be done to make a profit from pre-earnings IV increases ?

    Thanks in advance for your answers.