TY - JOUR
T1 - Earnings announcements and option returns
AU - Chung, Sung Gon
AU - Louis, Henock
PY - 2017/1/1
Y1 - 2017/1/1
N2 - 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.
AB - 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.
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U2 - 10.1016/j.jempfin.2016.07.010
DO - 10.1016/j.jempfin.2016.07.010
M3 - Article
AN - SCOPUS:85002812494
SN - 0927-5398
VL - 40
SP - 220
EP - 235
JO - Journal of Empirical Finance
JF - Journal of Empirical Finance
ER -