Weekly Option Premium and Earnings

Discussion in 'Options' started by Brennen81, Aug 2, 2017.

  1. Hello all,

    I am attempting to perform a quant analysis on (weekly) stock options premiums around their earnings.

    My question is in regards to how anyone here would go about adjusting the premium for options with more or less time to expire. Essentially, remove the time from the equation.

    For example. Say it's Monday, the company earnings were out after close, and I was looking at the stocks option expiring Friday. The options would have a certain premium already for the time, plus the earning premium. Now if that stock was posting earnings on Thursday after the close (assuming underlying price and implied vol is exactly the same, etc) the option should have a slightly lower premium due to time.

    So in the end. If I am analyzing multiple company earnings dates through out the week, how would any of you go about (mathematically) adjusting for the extra premium earlier in the week? I want to somehow give them all an equal playing field. I know we may not be able to get an exact formula. But I am hoping there may be a general rule of time premium decay from Friday close to Thursday close (day before expiry).

    Hope I made sense.
     
  2. Robert Morse

    Robert Morse Sponsor

    Unfortunate, there is no perfect answer. If I go forward to less days to expiration, you are assuming Ivol will not change from now until then. You might get decay, you might not. You will have to make assumptions. We offer the LVX platfrom. With this, you can go back and study the past price and vol changes. https://www.lightspeed.com/trading-platforms/livevol-x/
    Here is an example with AAPL:
    upload_2017-8-2_11-13-52.png
     
  3. Thanks, Robert. I definitely did not think there is a specific formula. But for sure as of the now with the data I have, the average premium decreases from Friday to Thursday (Monday to Friday open after earnings announced). Just need to figure out the best guess amount to either subtract from the earlier days or add to the later. I do not think just normalizing the number would do the trick. Maybe If I had 100's of release data. But I don't.
     
  4. Is your question how much additional premium you're paying for the earnings volatility vs. no known news events?

    For OTM options a few strikes away, you can do this by comparing the daily to the monthly since they have relatively linear decay--but the closer you get to the current price, the less accurate this would be. It's also inaccurate if you get far enough out to illiquid strikes.

    You could also approach the question from the other side, look back at the earnings release gaps, and use the average of the absolute value of the gap but weighted by volume. (You probably need to tweak that method a little bit to match your goals)