Earnings Announcements and Option Returns

43 Pages Posted: 16 Dec 2016

See all articles by Sung Gon Chung

Sung Gon Chung

Wayne State University

Henock Louis

Pennsylvania State University - Smeal College of Business

Date Written: April 2016

Abstract

While prior studies find that returns on option straddles are generally negative, we show that returns on straddles purchased prior to earnings announcements are actually positive. The earnings announcement impact is compounded when the pre-portfolio formation volatility is low (high) and the pre-expiration realized volatility is high (low). Apparently, the average option trader underestimates future volatility before forthcoming earnings announcements, particularly after a period of relatively low volatility, and overestimates future volatility after recent earnings announcements, particularly after a period of relatively high volatility. The overestimation of future volatility after recent earnings announcements also increases with the magnitude of the earnings surprise.

Keywords: Earnings Announcement; Option Pricing; Stock Return Volatility

Suggested Citation

Chung, Sung Gon and Louis, Henock, Earnings Announcements and Option Returns (April 2016). Journal of Empirical Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2886040

Sung Gon Chung (Contact Author)

Wayne State University ( email )

5229 Cass
112 Rands House
Detroit, MI 48202
United States

Henock Louis

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802-3306
United States
814-865-4160 (Phone)
814-863-8393 (Fax)

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