Estimating an Event-Day Move from Option Term Volatility

Summary

The document asks how to estimate the underlying’s expected daily move on a macro event date using at-the-money call options with maturities of one, two, and three months. The event falls after the shortest expiry but before the second, and each option has a different implied volatility. The author compares this problem with estimating an earnings move from an at-the-money straddle that spans the event, then asks whether a calendar spread could help when only calls are available.

No calculation or answer is provided, so the document does not establish a method for isolating event variance from the surrounding option term structure. It is useful as a question about the distinction between total implied volatility over an option’s life and the volatility attributable to a specific day. Any estimate would depend on additional assumptions and data, such as how implied variance accrues over time and whether the call prices provide enough information to infer the relevant event exposure.

Key ideas

• The question concerns estimating a single event-day move from options with different expiries.
• The macro event occurs after the shortest option maturity and before the second maturity.
• The author asks whether a calendar spread can isolate event risk when only calls are available.
• The document presents no calculation or conclusion, so it does not validate a specific estimation method.

Tags

# Expected underlying daily move from implied volatility


# Expected underlying daily move from implied volatility












Suppose I have 3 ATM call options on an underlying with time to maturity 1, 2, and 3 months, respectively, priced at implied volatility level $\sigma_1$, $\sigma_2$, $\sigma_3$. Given that there will be a major macro event after 1 month but within 2 months in the future, how can i use these info to compute the expected daily move of the underlying for the macro event day?

I know we can compute expected daily move for earning event by using ATM straddle covering the event day and look at breakeven points. But given that we only have call options here, I'm guess could constructing a calendar spread help?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.