Welcome to this walkthrough of the long volatility strategy for earnings.
This guide will summarise the key points you need to know about researching and implementing this strategy.
Be sure to take the quiz at the end to test your understanding and receive personalised feedback.
Implied volatility (IV) rises in the weeks and days leading to an earnings announcement - IV Rush
IV then sharply drops on the first trading day after the release - IV Crush.
Why?
This happens because the market anticipates the expected move on earnings.
Stocks experience more or less significant price moves on earnings day, and the market accounts for this by inflating IV before earnings, and then crushing it right after the release.
This is why implied moves are higher before earnings compared to a random day.
When we talk about the implied move, we're typically referring to the breakeven points of a classic long volatility position, a straddle with the closest expiration to the earnings day.
The implied move is absolute, with the focus on the magnitude of the move rather than its direction.
Typically, this implied move would more or less match the stock's average move on earnings in the past.
This expected move, driven by higher IV, doesn't always match what actually happens in the market, which can create opportunities for trading strategies.
Below, we can observe NVIDIA's past earnings movements.
Note that the last two earnings reports significantly exceeded the historical average of around ±7%, with increases nearly double that amount.
In contrast, the two earnings reports prior to these showed smaller movements.