What makes a stock's options' IV spike before earnings?

[Guest]

I've been thinking quite a bit about what makes certain stocks good candidates for an earnings straddle/strangle trade, and what makes others bad.  In that vein, I researched the 768 stocks priced between $40-$120 since that is kind of a sweet spot for options prices that are trade-able.*  

 

What I found is that some stocks have absolutely no relationship between IV and earnings announcements.  What was more interesting, is that some stocks used to have a nice IV spike and no longer do.  And also true, some stocks did not spike, but now they do.

 

I think we would all agree that we would be better off if we could better predict which stocks are more likely to experience an earnings related IV spike, and which are not.

 

Some of my initial hunches are to look at stocks that are more volatile (i.e. NFLX, EBAY) and also stocks that have had large earnings surprises in recent quarters.  It does appear that the more volatile stocks tend to have more earnings related IV spikes.  I am not really able to test the second hunch since any list I find of stocks that have had earnings surprises has mainly lower priced stocks, many below $10.  However, my reasoning is along  these lines: "Stock XYZ had a huge earnings surprise in the 4th Quarter, so now, going into earnings seasons in the 1st quarter, we would expect the IV of XYZ's options to spike."

 

I would love to hear (read) input from other members and ideally be able to better set ourselves up for earnings season with higher probability trades.

 

Thanks,

Mike

 

 

*These stocks have options priced to accommodate a portfolio of $10,000 or $20,000 allocating 10% to each trade.  For the stocks less than $40, you have to buy so many contracts that the commissions start to really eat into your profits, and for stocks more than $120, even doing a straddle with 1 contract may be more than 10% of the portfolio.

 

 

[Guest Corto]

I will qualify my response that I have canceled my subscription and will only be around for four more days, so please everyone take my comments with that in mind, good or bad.

 

 

The comment:

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"What I found is that some stocks have absolutely no relationship between IV and earnings announcements.  What was more interesting, is that some stocks used to have a nice IV spike and no longer do.  And also true, some stocks did not spike, but now they do."

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is the reason I am moving on.  I was unable to convince myself that there was a relationship the could be predicted by looking at history.  Every earning cycle is different, every cycle has a chance of pre-release to the general public or only a select few of information that can make the result more, or less, volatile.

 

To be totally up front, Kim, recently has been doing a great job of balancing the IV trades with calendars which recently have been good trades that I wish I were in.  But I originally joined for the non directional trading, and have enough risk outside of that in my regular portfolio that I chose not to continue.

 

Regards,

 

Mike