just started using Orats and pretty happy so far. Support is great and I did ask them but no reply on this question so could anyone give me an idea who is more skilled with orats? having a little difficulty with Orats use of implied volatility to look at earnings moves. Likely my ignorance, but the normal options models expect continuous trading/pricing, while event oriented trading should rely on something like a jump-diffusion model, or the like. If you watch any volatile stock’s IV around earnings, IV rises into the event and falls dramatically immediately after. This fall does not tell you if you will/did make money or lose money from the event. You could be short the straddle, have the IV drop dramatically after earnings and still lose your shirt based on the delta effect (price movement.). Can anyone explain why Orats method works or why Orats IV should be looked at for an event (like earnings.). AND question 2 Why use the ITM call prices to determine volatility? reading through the docs I see Interpolated Implied Volatilities At Various Deltas Orats present the constant maturity implied volatilities at various delta levels in addition to at-the-money 50 delta: The 5, 25, 75 and 95 call delta IVs are also presented. They are wide markets that theoretically should be the same as the put IV (with the exception of early exercise premium for American options, Why not use the OTM IV’s across the spectrum of prices?
As I emailed you back today, the constant maturity deltas are a reference and does not imply that we use the ITM IVs to create these important calculations. We weight the ITM IVs less than the OTM IVs to come up with those levels. We work very hard to create a smooth theoretical IV curve through the strikes, our SMV system, described elsewhere on ET. I have also explained in a blog emailed to you today, and elsewhere on ET that our implied earnings move uses the nearest straddle to earnings with the residual straddle price removed. This is an involved process that uses thousands of stock moves after earnings to develop a likely distribution to take an expected value of the left over value of the straddle. The more DTE the higher the value of the straddle. Of course, we are aware that the IV moves up near earnings, that is why you want to buy options when the expected move is greater than the implied earnings move. This is why you need to find what the market is implying for a move and estimate where volatility will fall after. That way you can isolate what you are paying for the earnings move. Our data is very good on this front and we even do forecasts of the move vs the implied move. This is a report from yesterday using our data that identified BILL & FTNT as earnings move buys in green (both moving today well over their implied move) and selling SYK and others that worked out well for iron condors. https://gyazo.com/d5624ee49555a6dc4de7834152faf4e0
hi there thank you for the reply on this forum and in the email. I thought that your metric impliedearningsmove was a recent addition. Does the blog article you kindly attached, thank you. If it replaces / augments impernmv then there has to be a reason and a way of achieving that reason. The article you sent was from 2018 so does the approach still apply to the 2023 variant impliedearningsmove?
Yes. We have been in business since 2001 so new is relative. We developed the residual straddle value approach in 2017-2018 and that metric was better than the old ones, implied earnings effect and impernmv. Thanks for pointing that out.
I so the article from 2018 applies to the impliedearningsmove indicator? I am just making sure. Your data is excellent and so easy to work with. Curl, python, julia, mojo all works out of the box, OUTSTANDING! experience tells doesn't it
Yes, as said in the article "ORATS has a method for isolating the straddle price that relates only to the earnings announcement. To do this we project an earnings move distribution and the implied volatility change from before earnings to after earnings. Isolating the straddle allows for better comparisons to historical earnings straddles especially when the days to expiration or implied volatility are different."
good I wanted to make sure that the article from 2018 was covering how ORATS comes up with the indicator impliedearningsmove thank you for confirming that.