^RIMM^ reported their earnings Wednesday after the bell and as usual, the implied volatility in RIMM’s options increased dramatically. In addition to implied volatility spiking, RIMM’s options were heavily traded yesterday.
The April 80 call options saw nearly 35,504 contracts change hands with open interest around 43,980 contracts. Clearly the earnings report caused significant volume to come into RIMM’s April and May options. The RIMM April 70 put saw over 20,300 contracts change hands with an open interest of 29,394 contracts.
It is obvious that the earnings report juiced volume, but option traders need to know that implied volatility also increases dramatically in most cases ahead of earnings reports. Specifically, implied volatility increases when the underlying security is associated with a company that is hyper beta or has a risk coefficient which is greater than the broad indices themselves.
In many cases, earnings reports can provide excellent profit opportunities for options traders. Just like with any type of trading, there are inherent risks associated when using option strategies to trade around earnings reports. Here are two things to consider.
For one, novice traders are not necessarily aware that thinly traded options offer huge potential risks as bid/ask spreads tend to be wide. RIMM, however, has very liquid options and spreads are generally fairly narrow, so it passes this test. The next thing to think about is what strategy is going to be the best way to play earnings. Since implied volatility is typically elevated before earnings, traders need to focus on it. Traders generally need to look for ways to hedge volatility risk when trading directionally.
Dan Passarelli is the author of the book Trading Option Greeks and founder and CEO of Market Taker Mentoring LLC. Passarelli began his trading career trading on the floors of the Chicago Board Options Exchange and the Chicago Board of Trade making markets in options. He regularly shares trading insights and educational tips in his options blog (markettaker.com/options_blog/). Dan can be reached through his website MarketTaker.com and can also be followed on Twitter at twitter.com/Dan_Passarelli.
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