With earnings season winding down, we are provided a great opportunity to consider buying options. It doesn’t matter whether we are looking at calls or puts. Option prices, whether calls or puts, will typically rise as earnings announcements near. They rise in anticipation of a potential big move in the stock after the earnings are announced. Just this week, we saw AAPL drop $44.00 after earnings and NFLX rise $58.75 after earnings. These are not your typical moves, but moves that we can expect due to earnings announcements.
Generally speaking, option prices will be as cheap as you can get at any time during the year, right after earnings. The option prices for the few weeks after earnings are great buying opportunities. Anywhere from a couple weeks to a month after earnings, option prices will typically start to rise again and then really climb as earnings approach again. This rise and fall in option prices around earnings time is reflected by the implied volatility of the options. Implied volatility is based off of the option prices.
IVolatility.com is a site where you can track the implied volatility of optionable stocks. You have to have an account, but you can create an account for free by providing an email address. At this site, you can pull up a 1 year chart that shows implied volatility for the stock you want. You will typically see 4 times during the year, where implied volatility rises significantly, followed by a quick drop. These peaks are usually 3 months apart, which reflect earnings announcements.
There certainly can be other times where implied volatility is high or low, which is why checking a chart for the implied volatility is helpful. Something to keep in mind is that implied volatility represents prices of numerous options for the stock. You will find that some individual options are much more expensive than others. Back to an earnings example, GOOG announces earnings tonight after the market close. The weekly options for GOOG that expire tomorrow have a much higher implied volatility than the options that expire the week after. In fact, as you get further away from the earnings, the implied volatility continues to drop to a point where the implied volatility is at its normal level for the stock.
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