Scheduled Events

An announcement with a date on it has a price, and the option chain quotes it out loud. A stock at 100 whose straddle costs 6.00 into the print is quoting a six per cent move. Three numbers fall out of that quote that almost nobody separates. The straddle breaks even at six per cent, but the long call inside it breaks even at 3.10 per cent, which is roughly half — so the usual warning that you must beat the implied move overstates a single option’s hurdle by about a factor of two. A four per cent move in the wrong direction costs the call its entire premium, and a four per cent move in the right direction earns the put holder 1.10 against the 2.90 it paid. And a stop sitting one per cent away is a stop the market has publicly quoted a move six times larger than, which is the arithmetic behind trading the reaction rather than the announcement.

Prerequisites: Lesson 42, which handled the other kind of scheduled discontinuity — the one whose contents are published in advance — and lesson 40, whose overshoot multiplier is what a position pays for being on the wrong side of one of these.

One event, priced three ways

A stock at 100. For the expiry just after the announcement, the call at the 100 strike costs 3.10 and the put costs 2.90, so the straddle costs 6.00 and the implied move is six per cent. The band is 94.00 to 106.00. Below, what each position is worth per share at expiry, by realised move, counting intrinsic value only.

Realised move	Long call	Long put	Long straddle	Short straddle
0%	-3.10	-2.90	-6.00	+6.00
+2%	-1.10	-2.90	-4.00	+4.00
+3.1%	0.00	-2.90	-2.90	+2.90
+4%	+0.90	-2.90	-2.00	+2.00
+6%	+2.90	-2.90	0.00	0.00
+10%	+6.90	-2.90	+4.00	-4.00
-4%	-3.10	+1.10	-2.00	+2.00

Read the two four-per-cent rows together, because between them they contain the whole complaint. A four per cent move up earns the call buyer 0.90 against 3.10 risked; a four per cent move down costs him all of it. And the put holder, who was right about the direction on that same down day, collects 1.10 on a premium of 2.90 and is still behind. Four per cent is an enormous day for most instruments, both of these traders called it correctly in one direction each, and one of them lost everything while the other lost most of it. Nothing went wrong. The band was quoted at six and the move came in at four.

The short straddle column is the mirror image and is worth staring at for a different reason. It collects money on every row inside the band, which is most of the table and, on a fairly priced event, most of the events. It pays on the outside rows. That is a payoff shape rather than an edge: a strategy that wins often and loses large is not the same thing as a strategy that makes money, and the two are distinguishable only by measurement over enough events to see the tail, which is lesson 19’s arithmetic and a larger number than most people run.

Why the reaction is a different trade from the announcement

Now the part that turns a piece of folklore into arithmetic. The usual advice is to trade the reaction rather than the announcement, and it is usually offered as a temperament: be patient, do not gamble. It is better than that. It is a statement about the size of your stop relative to the quoted move.

Suppose your stop sits one per cent from entry, which is ordinary. The market has just quoted a six per cent move on this instrument, over an expiry that includes the announcement. That quote is public, it is a price, and it says the expected travel is six times your stop distance. You do not need any view on the announcement to see what follows: a stop one-sixth the size of the quoted move is not protection, and about half of that expected travel goes in the direction that takes you out — which is the coin flip you were trying to avoid, and the chain printed its width at 6 per cent before you took it.

Then lesson 40 charges you for the flip. A stop that sits inside a discontinuity does not fill where it is written; on the module’s own gap series it filled at a median of one and a half times its promised loss and at four and a half times in the worst case. So a two per cent risk budget carried through an announcement is not two per cent. At the median it is three, at the mean four, and at the worst nine. Sizing so that the worst observed overshoot lands on a two per cent budget means trading at 0.44 per cent, which is a fifth of what the stop distance alone would suggest.

Waiting until after the print changes none of your skill and all of the arithmetic. The dated uncertainty has been resolved, the quote for it has come out of the option chain, and the same one per cent stop is now sitting in a market whose remaining width is a fraction of what it was. The trade you are declining is not a good trade you were too timid for. It is a trade whose stop the market had already priced through, at a cost it had already published.

What standing aside costs

Standing aside is not free either, and the price is countable. Sitting out the session before and the session after each event, on a 252-session year:

Scheduled events a year	Sessions removed	Share of the year	Every measurement then takes
4 — one stock’s earnings	8	3.2%	1.03× as long
12 — a monthly release	24	9.5%	1.11× as long
24 — earnings, rates and monthly data	48	19.0%	1.24× as long
48 — a full macro calendar	96	38.1%	1.62× as long

The last column is lesson 19’s cost arriving again. Removing a fifth of your sessions removes a fifth of your trades, and the number of trades needed to establish an edge did not change, so everything you will ever want to measure about yourself takes a quarter longer to measure. At the bottom row it takes over half as long again.

And because sitting out the calendar is a filter, lesson 39’s two break-even points apply to it without amendment. It improves your expectancy only if the sessions it deletes contained a higher share of your losers than of your winners, and it improves your money only if that ratio beats your profit factor. Nobody knows whether event days are worse than ordinary days for a given trader until that trader has counted, and the counting is the third problem below. What is settled without counting is the sizing: on an instrument you intend to hold through, the risk budget you write down is not the risk you are running, and the multiplier between them is the one lesson 40 measured.

What this does not settle

That the implied move is a forecast. It is a price, produced by the same process as every other price, and it already contains the preparation of everyone who trades that instrument for a living. Reading it tells you what you have to beat; it does not tell you whether you will. And it is a quote for the whole period to expiry, not for the announcement alone — on a weekly expiry those are nearly the same thing, and on a monthly one they are not.

That the reaction is a trade waiting for you on the other side. Everything above is about the announcement trade, and it establishes that the stop was priced through before it was placed. It says nothing at all about whether anything is left afterwards. The chain quoted six per cent, and if the instrument delivers six per cent then the reaction starts six per cent from where you were watching, at a price none of your levels was drawn against, with the dated uncertainty and the premium that was pricing it both gone. Waiting is the cheaper of the two mistakes and it is still a choice with a cost, and the cost is that the setup you were going to take may not exist once the print has moved the price out from under it. Nothing here measures how often it survives, which is the third problem below wearing different clothes.

That the table settles what an option trade makes. It counts intrinsic value at expiry and nothing else, which makes it exact and makes it a floor. A position closed the morning after the print is settled at a quote, not at intrinsic value, and the dated uncertainty that was supporting that quote is gone by then whatever the news said. The real hurdle for a trade closed the next morning is higher than every number in the table, by an amount this lesson has not measured.

That the six per cent, the 1.5 and the 4.5 are yours. The straddle is a made-up quote chosen so the arithmetic is checkable; a real one is whatever your chain says this week. The overshoot multipliers come from nineteen constructed gap events in lesson 40 and are that series’s numbers, not the market’s. Both are worth exactly as much as the method and nothing as figures: read your own chain, and measure your own overshoot on your own instrument.

That every scheduled event is priced the same way. The option chain quotes a move for instruments that have listed options and a liquid expiry near the date. Plenty of what sits on a trading calendar has neither, and for those you have no quote to read and are back to guessing at the width. That is not a reason to guess confidently. It is a reason to notice that the instruments where you can see the bar and the instruments where you cannot are different instruments, and to size the second kind as though the bar were higher.

Problems

1. Read the bar before you take the trade. For the next scheduled event on an instrument you follow, write down three numbers the day before: the straddle, the implied move as a percentage, and the break-even of the single option you were actually thinking of buying. That third number is the one that decides your trade and it is the one nobody writes down. It takes under a minute and it will occasionally stop the trade on its own.
2. Compare your stop with the quote. Take the stop distance you normally use on that instrument, as a percentage, and divide the implied move by it. If the answer is comfortably above one, the market has quoted a move larger than your stop and you are holding a coin flip with a known price rather than a trade. Then multiply your intended risk by the median and worst overshoot you measured in lesson 40, and read what your two per cent actually is.
3. Count whether event days are worse for you. Split your own record into trades opened on a scheduled event day and everything else, and count four numbers in each: winners, losers, total won, total lost. If the event days lost money outright, that is a cost you have already paid and you can stop paying it today. Whether their hit rate is genuinely lower than the rest of the year is the harder question, and lesson 41 prices how many observations it needs — which for most people is more event days than they have traded. How to Collect a Base Rate is how the count is kept honest.

Sources. William H. Beaver, “The Information Content of Annual Earnings Announcements” (Journal of Accounting Research, 1968), for the founding measurement that price variability and volume both rise at the announcement and fall away after it — the empirical fact every argument in this lesson rests on, established before anyone was quoting an implied move. James M. Patell and Mark A. Wolfson, “Anticipated Information Releases Reflected in Call Option Prices” (Journal of Accounting and Economics, 1979), for the other half: implied volatility rises into a dated announcement and collapses once it lands, which is the premium collapse in this lesson, measured rather than asserted. Andrew Dubinsky, Michael Johannes, Andreas Kaeck and Norman J. Seeger, “Option Pricing of Earnings Announcement Risk” (The Review of Financial Studies, 2019), for the modern version, which extracts the size of the jump the market is pricing from the option surface itself and asks whether it is priced fairly.

The implied move is a volatility quote wearing a date. Strip the date off and the same quantity is there every day, on every instrument, whether or not anything is scheduled — and it can be measured from prices you already have rather than read off a chain. Lesson 44 treats volatility as a quantity in its own right: how to compute it from a series, why the number depends on the window in exactly the way lesson 38 predicted, why the volatility a chain quotes and the volatility a tape delivers are two different numbers with a persistent gap between them, and what having a number for it changes about position sizing.

Educational only. Trading involves substantial risk of loss. Not financial advice. Past performance does not guarantee future results.