You hear people say "The options imply that XYZ is going to move 10% tomorrow when earnings are released." How do they calculate this? I do remember hearing something along the lines that they take the ATM prices to calculate it. Let's use AA for its earnings tomorrow: (All prices as of Tuesday after market close) Stock Price: $9.41 ATM Call Price: $.39 ATM Put Price: $.97 You add these together: .39+.97=1.36 You divide it by the current stock price: 1.36/9.41=.145 This gives you the possible movement of : 14.5% Is this right? I could be completely wrong. Let me know.
1) Ideally, it's the front-month straddle-premium with respect to the strike price if the stock is trading very close to the strike price. 2) Generally, it's the front-month strangle-premium with respect to each of the strike prices of the strangle.
No. Subtract the ATM straddle priced at your estimate of IV after the post earnings crush, say .78. 1.36 - .78 = .58 then divide by the price