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Anticipating jumps: Decomposition of straddle price

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  • Chen, Bei
  • Gan, Quan
  • Vasquez, Aurelio

Abstract

We develop a novel method to decompose a straddle into two assets: a volatility risk asset and a jump risk asset. Using the price ratio of the jump risk asset to the straddle, we create a forward-looking measure (S-jump) that captures the stock price jump risk anticipated by the option market. We show that S-jump substantially increases before earnings announcements and strongly predicts the size and the probability of earnings-induced stock price jumps. We also find that S-jump amplifies the earnings response coefficient. Our jump risk asset captures the run-up and run-down return patterns observed for straddles around earnings announcements.

Suggested Citation

  • Chen, Bei & Gan, Quan & Vasquez, Aurelio, 2023. "Anticipating jumps: Decomposition of straddle price," Journal of Banking & Finance, Elsevier, vol. 149(C).
    • Handle: RePEc:eee:jbfina:v:149:y:2023:i:c:s0378426622003351
    DOI: 10.1016/j.jbankfin.2022.106755
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    References listed on IDEAS

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    More about this item

    Keywords

    Jump risk; Straddle decomposition; Earnings announcements;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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