Event Volatility

Generally, no - unless you have a specific reason. On average, implied move exceeds actual move, so option sellers have an edge. If you hold through earnings, be prepared for IV crush to hurt even if you're right on direction. Most beginners should capture IV rise pre-earnings and exit before the announcement.

IV crush. Even if the stock moves in your direction, the collapse in implied volatility can more than offset your gain. If IV dropped from 50% to 25% and the stock only moved 3%, the vega loss exceeds the delta gain. This is the most common surprise for new event traders.

Expected move is what the options market implies will happen (calculated from straddle price). Actual move is what really happens. On average, expected > actual about 55-60% of time, which is why option sellers have a slight edge around events.

Trade individual UK stocks for company-specific events (earnings). Trade FTSE for market-wide events (BoE meetings, major data). FTSE options are more liquid. Note that UK stock options can be less liquid than US equivalents, so check bid-ask spreads.

Maximum 1-2% of your account per event. Events have binary outcomes - you can be completely wrong. Never risk an amount that would significantly impact your account. Treat event trades as high-variance bets, not core positions.

Compare current IV to historical pre-event IV levels for the same type of event. Also compare implied move to historical actual moves. If current implied is in the top quartile vs history, it's 'rich' (favor selling). If bottom quartile, it's 'cheap' (favor buying).

Pre-event (buying vol) has defined risk and captures predictable IV rise. Post-event (selling vol) captures reliable IV crush but requires waiting and has some continuation risk. Pre-event is safer; post-event often has slightly better expected return but more can go wrong.

Fed decisions (19:00 GMT) and overnight US earnings affect UK markets at the next open. You can trade overnight FTSE futures, position beforehand and accept gap risk, or wait for UK open. After-hours events create execution challenges and gap risk.

Spreads reduce IV sensitivity (lower net vega) so IV crush hurts less. This makes them better for directional through-event bets. However, they also cap your upside if the move is large. Use spreads when you have directional view but want to mitigate IV crush impact.

Central bank events affect entire markets, not just individual stocks. IV build-up is often shorter (3-5 days vs 2-3 weeks for earnings). The crush is usually faster and cleaner since there's a single announcement. Multiple instruments trade the same event (FTSE, GBP, rates).

Decompose variance into event and non-event components: Total Var = Event Var + Non-Event Var. Use term structure to estimate non-event IV; solve for implied event move. For more sophistication, use jump diffusion models that explicitly model discontinuous price changes at events.

You need historical options data (expensive), event dates, and careful methodology. Avoid survivorship bias (include delisted companies), look-ahead bias (don't use future information), and liquidity fiction (use realistic fills). Test on out-of-sample data. Historical edge may not persist.

Track aggregate event exposure: total vega, max loss if all events go wrong, and correlation during stress. Set limits (e.g., max 2% per event, 10% aggregate). Remember that events correlate during market stress - your earnings trades and central bank trades might all go wrong together.

Yes, using option prices across strikes. For binary events, digital option or strike interpolation methods work. For continuous outcomes, fit a distribution (mixture models) to option prices. The derived probabilities reflect market consensus; trade if you disagree with genuine edge.

Event vol can be an alpha source (systematic earnings strategies), a risk factor to manage (event exposure in vol portfolio), or a relative value opportunity (rich vs cheap event vol across names/times). Sophisticated vol traders integrate event analysis with broader term structure, skew, and vol surface strategies.