The options market response to accounting earnings announcements

Too Good to be True? An Analysis of the Options Market's Reactions to Earnings Releases

“…In our study, we chose to focus on domestic earnings announcements, but note our techniques can be used for other announcements such as those in Choi (2014) and Tsai (2014). Rogers et al (2009) andTruong et al (2012) distinguish how good and bad news released during earnings announcements have different effects on implied volatility. Our first main research question examines whether earnings releases have differential uncertainty resolution, and if so, what drives these differences?…”

“…Our first main research question examines whether earnings releases have differential uncertainty resolution, and if so, what drives these differences? Truong et al (2012) similarly calculates an 'options market earnings response coefficient', which related the change in option implied volatilities to whether the news released was positive or negative. Additionally, we expect uncertainty resolution to be greater for more credible firms.…”

“…Extant studies have used options to analyze uncertainty resolution depending on whether good or bad news is released during earnings. Rogers et al (2009) andTruong et al (2012) distinguish how good and bad news released during earnings announcements have different effects on implied volatility. Specfically, Rogers et al (2009) use a matched sample study design and changes in at the money option prices to conclude that short-term volatility increases with negative guidance.…”

“…Specfically, Rogers et al (2009) use a matched sample study design and changes in at the money option prices to conclude that short-term volatility increases with negative guidance. Truong et al (2012) similarly calculates an 'options market earnings response coefficient', which related the change in option implied volatilities to whether the news released was positive or negative. Our study contributes to this area by documenting that uncertainty resolution is not monotonic in terms of how good the news is, particularly for extreme events.…”

The informational role of thin options markets: Empirical evidence from the Spanish case

“…Moreover, they observe that part of the options trading prior to the release is informed. Truong et al (2012) conclude that the options market absorbs the information conveyed by the earnings announcement and that this news has a profound impact on option value. For the Spanish market, Blasco et al (2010) analyse the price impact on the underlying stock index of informed trading in the options market in the presence of eco-nomic news, concluding that potential informed trading is channelled through out-of-the-money options.…”