Option Strategies for Earnings Announcements: A Comprehensive, Empirical Analysis

9. Ride the Post-Earnings-Announcement Drift

The preceding chapter discussed entering positions a week or two prior to earnings announcement dates, to potentially exploit the run-up of implied volatility in the period before anticipated “big news” events. In this chapter, the other side of the timeline is examined. We examine the potential for profits in the period after earnings announcement days. A long line of studies in the accounting and finance literature points to a phenomenon known as “post-earnings-announcement drift,” or PEAD, which reflects the tendency of stock prices to “drift” (i.e., continue) in the same direction as the initial market reactions to earnings announcements. Specifically, if the market reacts very strongly and positively ...