RIMM Implied Volatility – Taking an uncharacteristic pre-earnings plunge | OptionsANIMAL
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RIMM Implied Volatility – Taking an uncharacteristic pre-earnings plunge

Before an earnings event, RIMM typically sees a ramp up in the implied volatility and then a dramatic drop after the announcement. The ramp is the result of increased demand for protection (i.e., buying options) for the move that is anticipated due to the earnings event.

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The drop after the event is a result of people selling their puts and calls once they know they results of the report. This drop is commonly known as “volatility crush” and is the bane of anyone who buys a straddle or strangle before an event. While big moves often happen, they are not enough to offset crush that occurs in the implied volatility. This is why straddles and strangle purchased immediately before an event are not often big winners.

What is curious about RIMM, is that it is making an uncharacteristic dive in implied volatility before earnings (which are December 16 after the market close.) A month ago, RIMM’s implied volatility was 54%, today it’s 43%. Typically, RIMM’s implied volatility is flat or rises before earnings.

What can you take from this behavior? It means that some traders must be confident that they know what RIMM plans to announce and they do not expect a surprise.

Looking at the put/call ratio, it would seem that the bias is upward. This will definitely be an interesting earnings event to watch. For me, I am going to keep the stock in a collar trade, which limits my upside, but also offers protection to the downside. I also have “pre earnings” double diagonal. But, according to my trading plan, I will close that before earnings.

Eric Hale

OptionsANIMAL Instructor

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