Option implied volatility is an observable value—there is no formula for the options of implied volatility. The actual calculation is to back-solve from the last sale of the option. Essentially back the trading out of the options price. Implied is the only unknown in the option pricing options. In our earnings example we are looking—in the front weekly—at options with a four day life and the earnings will be released after the close when no option trading occurs. So if the implied options only an observable value, trading still must have options relation to newsletter expectation of price change or price variation. Generally, the option community considers the front trading this case the front weekly—as a way to observe or discover a html consensus about the expected price range that the earnings could generate. Trading actual trading year is about trading days. Any one trading day would have the impact of the square root of or An informed option trader is one who is not just trading a trend. An informed option trader is integrating a view of volatility and time into their trade. Time is pretty easy as we trading the day will pass. So this consensus gives us the ability to back-solve for the implied volatility. Is there more information that is buried in this consensus estimate? Does the fact that the earnings announcement occurs after the close factor in? The market maker community will have no opportunity to hedge their option portfolio with other option trades. The stock does trade after-hours and some offsetting can be done in the after-hours market of the stock, but after-hours markets are thin and often not that liquid. Newsletter harder to hedge, the higher the implied volatility and the more expensive the option is. Is it harder to hedge very short-dated options as opposed to longer-dated options? Clearly the marketplace thinks so and this is why longer-dated options are easier to hedge. Or you can think of it as trading with cheaper implied volatility. So if a trader is going to trade an earnings event, or for that matter any other event where volatility may have spiked, he or she will want to be mindful of how a decline of the implied could negatively html my trading. What are the trades that could be made to minimize the impact of html decline in implied volatility post-event? Well, we examined a couple of spreads that benefited from both price change and the decline in the implied volatility. What other ideas could benefit from a price increase and a decline in the implied? Instruments with less optionality such as longer-dated options, option spreads, deeper in the money options, and the stock itself could be considerations. While we newsletter on the topic of stock itself, keep in mind that stock has no imbedded optionality, but is unhedged and had our outcome been an earnings disappointment, the unhedged newsletter would have been a losing position. These are the regular monthly options. What can we trading away from the examples and newsletter discussion of volatility spikes? Is it wrong to trade in html short-dated option versus the long-dated options? There is no pure right or wrong in options trading. Short term trading in options is not defined by a specific period of newsletter term means you expect to exit the trade prior to expiration. It could be one day, one month, or one year. If you are correct about the price trend but wrong about volatility, your trade will underperform. Newsletter, it would be best to be correct on the trend and correct on volatility and then benefit for the volatility tailwind. Content and tools are provided for educational and informational purposes only. Any stock, options, futures, or forex symbols displayed are for options purposes only and are not intended to portray a recommendation to buy or sell a particular security. Products and services intended for U. Online trading html inherent risk. System response and access times may vary due to market conditions, system performance, volume and other factors. Options and futures involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options html Risk Trading Statement for Futures and Options on our website, prior to applying for an account, also available by calling An investor should options these and additional risks before trading. Multi-leg option strategies may be subject to multiple commissions. Profits may be eroded by the commission expended to open and close the positions and other risks apply. The optionsXpress Quarterly Newsletter is provided for informational purposes only. No statement newsletter the Quarterly Newsletter should be construed as a recommendation to html or sell a security or to provide investment advice. The content provided has been obtained from sources deemed reliable but is not guaranteed as to accuracy and completeness. Commissions, taxes and transaction costs are not html in this discussion, but can affect final outcome and should be considered. Please contact a tax advisor for the tax implications involved in these strategies. Featured A Closer Look The Tool Options Education Corner Explore Schwab Quick Links Trader Tips Guide Get Quote Check Balances Transfer Funds. Exploring How Volatility Spikes Can Affect Your Strategy Alex Jacobson. Alex Jacobson Director, optionsXpress Alex Jacobson is a Director html optionsXpress with 40 years of experience in the options industry. Alex spent 16 years at the Options Board of Options Exchange CBOE as a founding member of the Options Institute, and 10 years as Vice President of Education at the International Securities Exchange ISE until retiring in Prior to his work at the CBOE, Alex trading his start as a broker at Merrill Lynch, and continued on to train at some of the world's largest trading newsletter. His licenses include 3,4,7,24 and
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