Naslov Earnings announcement impact on european options pricing: a trading strategy development Autor Mahmoud Ahmed Mentor Josip Arnerić (mentor)Ustanova koja je dodijelila Sveučilište u Zagrebu Datum i država obrane 2024-09-16, Hrvatska Znanstveno / umjetničko DRUŠTVENE ZNANOSTI Sažetak This paper examines the effect of earnings announcements on European options pricing, focusing on developing a trading strategy that exploits market inefficiencies, specifically the earnings surprise anomaly. The study is grounded in the Efficient Market Hypothesis (EMH), which claims that market prices incorporate all available information. However, it identifies anomalies such as the earnings surprise, which occurs when unanticipated earnings announcements lead to price movements not reflected in the market. The research is divided into several key sections. First, it reviews the literature on earnings surprises and the Post-Earnings Announcement Drift (PEAD), where stock prices tend to move toward the surprise after the announcement. Second, it explores the impact of earnings surprises on options. It uses key risk measures—delta, gamma, theta, vega, and others—to explain how these metrics influence options' value and risk profile. Building on this analysis, a trading strategy is proposed. This strategy involves identifying companies likely to report positive earnings surprises, constructing options positions that maximize returns from these announcements, and managing risk through the use of options Greeks. The strategy focuses on slightly out-of-the-money call options with a specific delta range and high volatility, timed to capture the early effects of PEAD while mitigating post-announcement volatility crush. The paper highlights that while such strategies are commonly employed by hedge funds, individual investors can replicate this approach to improve their portfolio’s performance. Emphasis is placed on risk management, diversification, and the potential to enhance the risk-return trade-off by combining systematic returns with alpha generated from market inefficiencies. The study concludes by suggesting that future research could focus on backtesting the strategy and exploring other anomalies for alpha generation.
Sažetak (engleski) This paper examines the effect of earnings announcements on European options pricing, focusing on developing a trading strategy that exploits market inefficiencies, specifically the earnings surprise anomaly. The study is grounded in the Efficient Market Hypothesis (EMH), which claims that market prices incorporate all available information. However, it identifies anomalies such as the earnings surprise, which occurs when unanticipated earnings announcements lead to price movements not reflected in the market. The research is divided into several key sections. First, it reviews the literature on earnings surprises and the Post-Earnings Announcement Drift (PEAD), where stock prices tend to move toward the surprise after the announcement. Second, it explores the impact of earnings surprises on options. It uses key risk measures—delta, gamma, theta, vega, and others—to explain how these metrics influence options' value and risk profile. Building on this analysis, a trading strategy is proposed. This strategy involves identifying companies likely to report positive earnings surprises, constructing options positions that maximize returns from these announcements, and managing risk through the use of options Greeks. The strategy focuses on slightly out-of-the-money call options with a specific delta range and high volatility, timed to capture the early effects of PEAD while mitigating post-announcement volatility crush. The paper highlights that while such strategies are commonly employed by hedge funds, individual investors can replicate this approach to improve their portfolio’s performance. Emphasis is placed on risk management, diversification, and the potential to enhance the risk-return trade-off by combining systematic returns with alpha generated from market inefficiencies. The study concludes by suggesting that future research could focus on backtesting the strategy and exploring other anomalies for alpha generation.
Ključne riječi
Earnings Announcement
European Options Pricing
Efficient Market Hypothesis (EMH)
Market Efficiency
Earnings Surprise
Post-Earnings Announcement Drift (PEAD)
Market Anomalies
Systematic Risk
Alpha Generation
Hedge Funds
Options
Greeks
Delta
Gamma
Theta
Vega
Risk Management
Options Trading
Call Options
Volatility Crush
Market Inefficiencies
Portfolio Management
Idiosyncratic Returns
Capital Asset Pricing Model (CAPM)
Markowitz Portfolio Theory
Trading Strategy
Risk-Return Trade-Off
Systematic Returns
Diversification
Beta
Lambda
Option Volatility
Volga
Backtesting
Inflation Illusion Hypothesis
Ključne riječi (engleski)
Earnings Announcement
European Options Pricing
Efficient Market Hypothesis (EMH)
Market Efficiency
Earnings Surprise
Post-Earnings Announcement Drift (PEAD)
Market Anomalies
Systematic Risk
Alpha Generation
Hedge Funds
Options
Greeks
Delta
Gamma
Theta
Vega
Risk Management
Options Trading
Call Options
Volatility Crush
Market Inefficiencies
Portfolio Management
Idiosyncratic Returns
Capital Asset Pricing Model (CAPM)
Markowitz Portfolio Theory
Trading Strategy
Risk-Return Trade-Off
Systematic Returns
Diversification
Beta
Lambda
Option Volatility
Volga
Backtesting
Inflation Illusion Hypothesis
Jezik engleski URN:NBN urn:nbn:hr:148:525049 Studijski program Naziv: Bachelor Degree in Business Vrsta resursa Tekst Način izrade datoteke Izvorno digitalna Prava pristupa Otvoreni pristup Uvjeti korištenja Datum i vrijeme pohrane 2024-09-17 19:13:33
