Why Option Pit Does Not Sell Earnings Option Premium

Why Option Pit Does Not Sell Earnings Option Premium

Options juice around earnings is, well, juicy. By juice I mean the level of volatility in the options or the extrinsic value of the option above parity.  The earnings are a 1 day shot but Black-Scholes wants volatility over a longer period of time, namely an annual period.   Earnings IV is so high into the date because some of the BS assumptions are broken for a day.  Lognormal distribution of prices is one of them since things are pretty much nuts.

How does one price a massive move for 1 day when it is near assured to happen?  Jack up the IV in the term near term and back off from there a bit as time gets longer.  The problem is where is the edge in a 1 day event?  The HIGHER IV pushes the line for success for a buyer and somewhat shields the seller.  However the seller has very little room to maneuver unless they take a lot more risk to trade stock after hours against their position in a HUGE move.  Trading vol edge over longer periods of time is not easy but there is time to recover and manage.  This is very little recovery with an earnings trade.  You are either right or wrong in a binary event.

That goes to our webinar in a couple of weeks, Fixing Terrible Trades.  There is a lot of opportunity before the earnings and after the earnings but little real edge THROUGH THE EARNINGS.  Part of Fixing Terrible Trades is not getting tied up in an impossible trade in the first place.

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