Anticipating jumps: Decomposition of straddle price

Bei Chen, Quan Gan and Aurelio Vasquez

Journal of Banking & Finance, 2023, vol. 149, issue C

Abstract: We develop a novel method to decompose a straddle into two assets: a volatility risk asset and a jump risk asset. Using the price ratio of the jump risk asset to the straddle, we create a forward-looking measure (S-jump) that captures the stock price jump risk anticipated by the option market. We show that S-jump substantially increases before earnings announcements and strongly predicts the size and the probability of earnings-induced stock price jumps. We also find that S-jump amplifies the earnings response coefficient. Our jump risk asset captures the run-up and run-down return patterns observed for straddles around earnings announcements.

Keywords: Jump risk; Straddle decomposition; Earnings announcements (search for similar items in EconPapers)
JEL-codes: G10 G12 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:149:y:2023:i:c:s0378426622003351

DOI: 10.1016/j.jbankfin.2022.106755

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