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The Efficiency of Weekly Option Prices around Earnings Announcements

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  • Jonathan A. Milian

    (School of Accounting, Florida International University, Miami, FL 33199, USA)

Abstract

This study examines the efficiency of weekly option prices around firms’ earnings announcements. With most of the largest firms now having options that expire on a weekly basis, option traders can hedge or speculate on earnings news using options that expire very close to a firm’s earnings announcement date. For earnings announcements near an options expiration date, one can estimate a firm’s expected stock price move in response to its earnings news (i.e., its option implied earnings announcement move) as the price of its at-the-money straddle as a proportion of its stock price. This study tests whether differences between historical earnings announcement moves and option implied earnings announcement moves predict straddle returns. Through the analysis of portfolio returns and Fama–MacBeth regressions, this study finds that straddle returns are significantly higher (lower) when the historical earnings announcement move is high (low) relative to the option implied earnings announcement move. In contrast to prior research, this study does not find an association between straddle returns and historical volatility, historical earnings announcement volatility, implied volatility, or the difference between historical volatility and implied volatility. Overall, this study suggests that weekly straddle prices around earnings announcements are not optimally efficient.

Suggested Citation

  • Jonathan A. Milian, 2023. "The Efficiency of Weekly Option Prices around Earnings Announcements," JRFM, MDPI, vol. 16(5), pages 1-14, May.
    • Handle: RePEc:gam:jjrfmx:v:16:y:2023:i:5:p:270-:d:1145938
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    References listed on IDEAS

    as
    1. Chung, Sung Gon & Louis, Henock, 2017. "Earnings announcements and option returns," Journal of Empirical Finance, Elsevier, vol. 40(C), pages 220-235.
    2. Sudipta Basu & Truong Xuan Duong & Stanimir Markov & Eng-Joo Tan, 2013. "How Important are Earnings Announcements as an Information Source?," European Accounting Review, Taylor & Francis Journals, vol. 22(2), pages 221-256, June.
    3. Torben G. Andersen & Nicola Fusari & Viktor Todorov, 2017. "Short-Term Market Risks Implied by Weekly Options," Journal of Finance, American Finance Association, vol. 72(3), pages 1335-1386, June.
    4. Gao, Chao & Xing, Yuhang & Zhang, Xiaoyan, 2018. "Anticipating Uncertainty: Straddles around Earnings Announcements," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(6), pages 2587-2617, December.
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