As an options trader, I am always on the lookout for potential earnings plays. One stock that caught my attention is CrowdStrike, due to a significant difference in implied volatility of options for the earnings week compared to the subsequent week. It is common knowledge that implied volatility tends to rise into earnings and then quickly drop down afterwards, but the magnitude of the difference in this case is noteworthy.
In this article, I will explore the implications of the differences in implied volatility pre and post-earnings for CrowdStrike options. I will also discuss potential options strategies to play these differences in implied volatility and how implied volatility tends to revert after earnings.
- Implied volatility tends to rise into earnings and then quickly drop down afterwards.
- CrowdStrike options exhibit a significant difference in implied volatility pre and post-earnings.
- Options strategies can be employed to take advantage of the differences in implied volatility.
IMPLIED VOLATILITY DIFFERENCES IN OPTIONS PRE & POST EARNINGS
As a volatility trader, it is essential to estimate where implied volatility is headed after earnings because we know that reversion is going to happen. Comparing different expirations and their volatilities can help me identify opportunities in the market.
Looking at the six-month implied volatility chart, I can see that the current implied volatility is in the middle of the range, from where it has been over the last six months. The range is from 32-33% to 58%, but the current implied volatility is around the mid-40s. However, this is only for this week’s options. If we run the same analysis for next week’s options, we can see that the implied volatility for next week’s options is all the way up around the mid-60s.
This difference in implied volatility between this week’s and next week’s options can be significant for traders. It is essential to consider the impact of implied volatility on options prices, as higher implied volatility generally leads to higher options prices. Therefore, traders should be aware of the implied volatility differences in options pre and post-earnings to make informed trading decisions.
OPTIONS STRATEGIES TO PLAY THE DIFFERENCES IN IMPLIED VOLATILITY
As an options trader, I always look for opportunities to take advantage of differences in implied volatility. One strategy I like to use is to sell high implied volatility and buy low implied volatility. However, it’s important to hedge yourself when selling high implied volatility.
Let’s take CrowdStrike as an example. Currently trading around 210, the at-the-money 210 straddle has an implied volatility of about 63.5. This is at the high end of the range where it’s been over the last six months. Going into earnings, it’s likely that the implied volatility will be even higher.
To take advantage of this, I would look to sell high implied volatility, but I would never do so without hedging myself. Instead, I would look at options one week out in CrowdStrike, where the implied volatility drops to the low 50s. While this is still expensive, it’s a better opportunity to buy options than at the current high implied volatility of 63.5.
In summary, to play the differences in implied volatility, I look for opportunities to sell high implied volatility and buy low implied volatility, while always making sure to hedge myself.
HOW IMPLIED VOLATILITY REVERTS AFTER EARNINGS
As soon as earnings are over, regardless of what the move is in the stock, implied volatility is going to revert back to its historical average. This is known as reversion to the mean, and it is a phenomenon that traders can take advantage of by using a specific strategy around earnings.
The strategy involves selling next week’s implied volatility and, as a hedge, buying the following week’s implied volatility. This works whether the trader is bearish, bullish, or neutral. If the trader is neutral, they can use at-the-money options with strikes around 205, 210, or 215. If they are bearish, they can use out-of-the-money options with strikes around 180. If they are bullish, they can use options with strikes around 230-240.
The key to this strategy is to identify a large enough difference between the earnings implied volatility and the following week’s or couple of weeks’ implied volatility. For example, a trader may see next week’s implied volatility up at around the mid-60s for earnings, and the following week’s implied volatility down at around 50-52. Both of these implied volatilities are going to revert back to their historical average after earnings.
By adjusting the implied volatilities to where the trader believes they will be trading after earnings, they can take advantage of the difference in implied volatility and potentially profit from the reversion to the mean. This strategy is particularly effective around earnings when there is a large enough difference between the implied volatilities.
In summary, traders can take advantage of the reversion to the mean phenomenon by using a specific strategy around earnings. By selling next week’s implied volatility and buying the following week’s implied volatility, traders can potentially profit from the difference in implied volatility and the subsequent reversion to the mean after earnings.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.