Stocks & Commodities V. 27:6 (62): Explore Your Options by Tom Gentile

Stocks & Commodities V. 27:6 (62): Explore Your Options by Tom Gentile
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Explore Your Options by Tom Gentile

VOLATILITY RISK

A stock I like has been trending higher, and I was considering a credit spread expiring in May. However, the earnings report is due May 7 and I canít determine whether this volatility rush will negatively affect my position... any advice for me?

You are correct, knowing the earnings reporting date when trading individual stocks can be very important. In addition, there is often a volatility rush ahead of earnings. In other words, the implied volatility (IV) of the options will begin to move higher prior to the earnings release. Why?

The market is very efficient when it comes to anticipating future volatility. When a stock is expected to make a big move, the option premiums become more expensive because big moves make it more likely that an option can move in-the-money by expiration.




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