Earnings Announcements and Option Prices

In this paper, we analyze the statistical and economic impact of earnings announcements on individual equity option prices. We develop no-arbitrage option pricing models in the presence of earnings announcements; we nonparametrically test for the importance of earnings announcements on option prices; we develop estimators of the primary parameter capturing the uncertainty present in earnings announcements, the earnings jump volatility; and we investigate the pricing implications of earnings announcements. We find strong evidence that uncertainty surrounding earnings plays a central role in determining option prices.