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Key Takeaways
- Map the report time to the option expirations that contain it.
- Compare total implied variance using IV squared times years to expiration.
- Price the event from the expirations on either side of the report: here the 7-day option at 30% IV and the 14-day option at 50%.
- Most of the 14-day option’s variance is the report itself: its 50% IV sits on a 30% baseline, and that event premium is spent the moment results print.
- Compare the straddle premium, expiration payoff and post-report price and IV scenarios together.
What is the earnings volatility cycle?
The earnings volatility cycle is the recurring repricing of option event premium around a company report. Expirations that contain the report carry extra implied variance for the announcement, which lifts their implied volatility above the ordinary baseline. Once results are known, that premium is removed or redistributed, and the options reprice to the new stock price, remaining time and implied volatility.
Identify the release time and which expirations contain it. Then compare their implied volatility at consistent forward moneyness.
Formula
Worked event model: total implied variance = baseline IV² × T + event variance. Event variance = event-containing IV² × T − baseline IV² × T.- Use volatility as a decimal and T in years.
- The example assumes a flat 30% baseline and one event after day 7 and before day 14.
- At 14 days and 50% IV, event variance is (0.50² − 0.30²) × 14 / 365 = 0.006137.
- Across the 7-to-14-day interval, subtract its ordinary baseline variance from the incremental total variance to obtain the same event component.
How is earnings event variance calculated?
XYZ reports earnings after day 7 and before day 14. At comparable forward moneyness, the 7-day expiration has 30% IV and the 14-day expiration has 50% IV. Use a flat 30% baseline and one event to calculate the worked variance decomposition.
- Seven-day total variance: 0.30² × 7 / 365 = 0.001726
- Fourteen-day total variance: 0.50² × 14 / 365 = 0.009589
- Incremental second-week variance: 0.009589 − 0.001726 = 0.007863
- Second-week baseline: 0.30² × 7 / 365 = 0.001726
- Event variance: 0.007863 − 0.001726 = 0.006137
- Equivalent full-window calculation: 0.009589 − 0.30² × 14 / 365 = 0.006137
The specified baseline leaves event variance of 0.006137. Carrying that same event component into 30-, 60- and 90-day expirations produces IV levels of 40.58%, 35.68% and 33.90%. Each point includes the event plus a different amount of baseline time.
Total implied variance is IV squared times time in years. The seven-day value is 0.001726 and the 14-day value is 0.009589. Their difference, 0.007863, covers the added week.
Subtract that week’s baseline variance of 0.001726 to obtain event variance 0.006137. The equivalent calculation subtracts all 14 days of baseline from the 14-day total.
Carrying the same event component into later expirations gives 40.58% IV at 30 days, 35.68% at 60 and 33.90% at 90. The event is spread over a longer time horizon. The figure plots those event-containing values above the flat 30% baseline, and the gap between the two curves is the report’s premium at each expiration.
How traders use the earnings volatility cycle
The same-strike call and put premiums form a straddle. Its combined entry premium determines the long straddle’s two expiration breakevens.
Compare those levels with the event’s price scenarios. After the report, the stock price, remaining time and implied volatility determine the option’s new value. Price each factor together to calculate the position’s result.
Before the report, compare activity in the event expiration in options flow and volatility skew across its strikes, then test entry cost, expiration payoff and post-report price and IV scenarios in the options profit calculator.
Limitations of the earnings volatility cycle
- Set the baseline from the expirations around the report. A sloped term structure moves the baseline, and a baseline above 30% leaves a smaller event premium inside the 14-day option’s 50% IV.
- Read direction from flow and price. Event variance prices the expected size of the move, and the actual move can be larger or smaller than the options implied.
- Mark post-report IV from the live chain. A surprise can keep implied volatility above the baseline after the report.
- Confirm the report time and date. A wrong one maps the event to the wrong expiration and misattributes the premium.
- Reprice the position on stock price, time and implied volatility together after the report. A drop in IV alone does not settle the trade.
Bottom line
The earnings volatility cycle explains why options that span a report cost more beforehand and give up the event premium once the report is out. Map the report to the right expiration, measure the event in variance terms against a stated baseline, and price any position across post-report changes in stock price and implied volatility together.
Clear answers
Frequently Asked Questions
Sources and Further Reading
- OIC: The Crush Is Real
- Cboe: Single Stock Volatility Jumps Higher as Earnings Approach
- Cboe: What Options Data May Indicate About Mag 7 Earnings
How entries are sourced, calculated and updated: editorial methodology.