6A.3 Implied earnings moves from options

Before results, option prices tell you how large a move the market expects, and that number is the benchmark for any view that the reaction will be bigger or smaller. The idea is additive variance: if the announcement adds an independent jump of variance $m^2$ to the normal-day variance $\sigma_b^2$, an expiry that contains the event carries total implied variance $\sigma_b^2T + m^2$, two expiries that both contain it identify $\sigma_b^2$ and $m^2$, and the expected absolute move is $m\sqrt{2/\pi} \approx 0.8\,m$ if the jump is normal. The market prices an implied move; M09A · 9A.10 derives it (Proposition 9A.9, equation (9A.13), where the event variance is written $e$), once M08–M09 have supplied implied volatility. M09A · 9A.7 derives the quick estimate, an at-the-money straddle worth about $0.8\,S\sigma\sqrt T$ (9A.8), and shows why straddle$/S$ overstates the event move: it also prices every other day's variance to expiry. Until you reach M09A, read the front-month straddle as a rough upper bound on the move the market expects, and compare it with the stock's own history of results-day moves measured as in 6A.2.