# Earnings: direction versus volatility

**OPT-14 · Core Options · Core**

**Lesson question:** What move must the paid premium overcome?

Original fictional examples; educational writing, not live market data, orders or production approval.

## By the end

- Explain the mechanism in the lesson question.
- Reproduce the worked comparison and recognize its failure case.

**Prerequisites:** OPT-F01, OPT-F02, OPT-F03, OPT-F04

An earnings trade contains an event and a volatility-price comparison. Expecting movement is insufficient if the options already charge for more movement. Uncertainty often reprices after the release, but no fixed IV collapse is guaranteed.

A directional and a long-volatility thesis should be written separately.

## Understand the mechanism

A long straddle buys both directions but pays both premiums. A short structure receives premium in exchange for adverse tail exposure. Spreads change the payoff and cap some outcomes, but do not remove gap, liquidity or assignment risks.

Before expiry, value depends on remaining time and the new IV surface as well as intrinsic.

## Walk through the process

Compare a plausible event outcome with the ticket's cost and breakevens. Include the disappointing-move and large-gap branches. Avoid labeling high IV automatically overpriced.

Know what information is already expected and when the event falls relative to the chosen expiry.

## Contract and decision boundary

Terminal examples use simultaneous intrinsic realization of all stated legs, before unspecified costs. Actual American exercise, assignment, early liquidation and broker handling can create different interim cash needs. These fictional comparisons are education, not orders or personalized investment advice.

## A worked example

A fictional same-strike 100 straddle costs 8.40 total. If it reaches expiry at 105, only the call has five points intrinsic; the combined loss is 3.40 per unit, or 340 per standard pair before fees.

The stock moved, but not far enough for this terminal purchase price. The graph is exact terminal P/L; it does not pretend to price the immediate post-earnings option while time remains.

## Graph: Earnings: direction versus volatility—worked comparison

**Horizontal:** Underlying at common expiry (USD)  
**Vertical:** Straddle terminal P/L (USD)

Fictional data from the written example. The chart organizes the comparison; its shape is not a forecast.

Complete numerical data are embedded in `scripts/options-strategies/OPT-14.js` and displayed as an accessible table in the HTML lesson.

## What would invalidate the reading?

A trader predicts the sign correctly but underestimates paid premium or IV repricing. A seller wins often but suffers a gap beyond collected premium.

## Check your understanding

### What is terminal P/L at 105 for the 100 straddle costing 8.40?

**Answer:** −340 for one standard call-plus-put pair before costs.

**Why:** Five intrinsic minus 8.40 paid.

### What is the critical failure to avoid?

**Answer:** A trader predicts the sign correctly but underestimates paid premium or IV repricing. A seller wins often but suffers a gap beyond collected premium.

**Why:** Explain this risk before treating the example as a decision rule. A correct calculation does not guarantee a favorable market outcome. **Critical risk check.**

## Takeaway

Return to the question: What move must the paid premium overcome? State the observed facts, the assumptions and the failure condition separately.

## References and provenance

The cited references support definitions and conventions. The teaching prose, tickets and numerical scenarios are original; they are not attributed as historical market observations.

- [OCC Options Disclosure Document](https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document)

- [OIC Strategy Reference](https://www.optionseducation.org/strategies/all-strategies-en)