HOOD: A Case Study in “Renting the Straddle”

Moontower Munchies #139

Friends,

This is an options post elbowing aside the post I was originally going to publish, because this is more timely. I apologize to the well-adjusted readers who don’t care about trading.

On Monday, I noticed that Robinhood ($HOOD) vol screened cheap in the Trade Ideas tool. But that tool uses 30-day constant maturity IV. Since HOOD earnings was just about 30 days out on Monday, the interpolation gave the earnings vol no weight. The pre-earnings vol is in the low 50s, which is, indeed at the bottom of the range for HOOD implied vol.

I looked at the vol that includes earnings.

HOOD reports earnings on February 10th. The February 13th expiry is currently priced at 64% ATM implied volatility.

At first glance, 64% might seem elevated but let’s decompose what the market is actually pricing. When a known event, like earnings, falls within an option’s expiry, the market assigns extra volatility to that expiration. But how much of that IV comes from the event itself versus normal trading day volatility?

I’m gonna lay out the numbers and then get to the process.

• Expected earnings move or straddle: 8.55%

• Event volatility (earnings day): 10.72% single-day vol (169.8% annualized)

Why?

The ATF straddle approximation tells us that a straddle ~ .8 x vol

Well, if we assume the earnings straddle is 8.55% then we just divide that by .80 (or multiply by 1.25 which is the arithmetic burned into trader brain) to get 10.69%

• Trading day volatility (pre-earnings): 54% annualized = 3.41% per day

Where do these numbers come from?

Let’s start with the earnings straddle…why 8.55%?

Here’s a handy secret. A good first guess what the market’s estimate for an earnings moves is the mean move size of the last 4 or even 8 earnings.

I just asked Gemini.

It’s a good first guess but then you run that number through our Event Volatility Extractor:

Once you’ve extracted the lump of variance that comes from an 8.55% move on a single day, the remaining variance until expiry is then divided over the remaining days. That’s what that calculator does. It tells you that the ex-earnings implied vol is 54% IF you accept that the earnings move is 8.55%

Since the IVs that precede the Feb 13th expiry are in the low-50s then the term structure ex-earnings is smooth and sensible. If it wasn’t, then we know the market is pricing a very different move size for earnings.

We are just slicing a pizza pie. The whole pizza is the total variance until Feb 13th, currently encompassed by 64% IV. The bigger you make the earnings slice, the smaller the remaining slices (regular trading days) have to be. If the extracted trading day vol turned out to be much lower than 54%, then the market must be expecting a bigger earnings move to account for the difference. Conversely, if it extracted to 62%, the market is pricing a smaller earnings move than 8.55%. The smooth term structure tells us 8.55% slices the pie correctly—each regular day gets roughly the same-sized piece. The Feb 13 expiry sits naturally in line with surrounding expirations.

But…

• If you think that’s too high for earnings, you could sell the Feb 13th expiry and buy the expiry preceding it. If you think it’s too low, you could do the opposite.

• If you think it’s a fair price, then you can simply judge the implied trading day vol on its own merit — 54%.

[Our tools will programmatically do this so that we can then use the ex-earnings vols in our standard Trade Ideas cross-section algo. Until then, we are adding a filter that allows you to exclude names with earnings upcoming from the cross-section sorter.]

So is HOOD vol cheap?

The Trade Ideas algo thinks it’s relatively cheap. Relative depends on your universe. Based on the universe I calibrated on (over 100 liquid ETFs and stocks) it screens cheap.

But an obvious follow-up question is…does it look absolutely cheap compared to its own history?

The answer is '“yea”. It’s not screaming cheap, but it’s on the cheaper side.

[This is where it helps to have context. Like if you follow the stock closely and have any feels on it then knowing the options are a bit cheap can inspire some trade structures that get you more juice for your knowledge.]

A few views into its history:

The current IV curve is lower than median realized vols,and a bit higher than current realized vols. BUT…current realized vols are also less than 25th percentile. They only need to sneeze up to median levels for these options to price much higher (especially if they maintain the same VRP ratio which is totally reasonable).

If you prefer time series, the current 30-day IV is sitting near the 1-year low for 1-month implied vol (red line).

Recapping some of the more challenging points:

• The entire “cheap vol” thesis depends on whether the 8.55% expected move is reasonable.

• While 8.55% matches HOOD’s historical average, that’s not how we finalized the number we should use. It’s a starting point that we then test to see if that move size would produce a smooth or humped term structure. If it causes the term structure to jump higher than we are using too small of an estimate, if it causes it to invert sharply, then we are using too high an earnings estimate. If your head hurts, you're doing this right. Maybe 8.75% or 8.35% makes the term structure a touch smoother but you can use the calculator to see how much little adjustments like that flow through to an implied trading day vol. It has a bigger impact than you might think…changing the earnings day straddle by .25% can move the trading vol by a .5 to 1 point. This is below the threshold anyone except high volume vol traders and market-makers should care about.

• The embedded risk you take when “renting the straddle”: the implied earnings move compresses as you approach February 10th - perhaps because the market decides HOOD’s earnings will be less volatile than historical patterns suggest - then your “cheap” pre-earnings vol becomes less cheap. You’d be holding a position where the event vol component is shrinking, pulling down the value of your straddle beyond normal theta decay. You’re not just betting on realized vol exceeding 54%. You’re also betting that the market continues to price in an ~8.55% earnings move.

Key Takeaway

Decomposing event volatility matters for cross-asset comparison and relative value analysis. A 64% implied volatility might look high in isolation, but after extracting a 170% event vol component (calibrated to produce a smooth term structure), you’re left with 54% trading day vol - which can then be evaluated against your regular toolkit.

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Appendix: Recipe for Cross-Sectional Analysis With Earnings Names

I used Claude to encapsulate and synthesize a recipe. You can decide how it did:

One of the most powerful applications of event extraction is enabling apples-to-apples comparison across tickers - even when some have earnings and others don’t.

The Problem

Standard cross-sectional vol analysis breaks down when comparing:

• AAPL at 35% IV (no events)

• NVDA at 48% IV (earnings in 30 days)

Which is really “cheaper”? You can’t tell without extracting the event component.

The Recipe

Step 1: Identify Events in Your Universe

For each ticker in your analysis:

• Check earnings calendar (next 30 days typically)

• Note FOMC weeks for macro-sensitive names

• Flag other known catalysts (FDA decisions, etc.)

Step 2: Extract Base Vols Using Term Structure Smoothness

For each ticker with events:

a) Pull the full term structure of ATM IVs

b) Use the Event Volatility Extractor with different move size assumptions

c) The “right” move is the one that produces a smooth, non-humpy base vol term structure

This is the key insight from the NVDA example: too high an earnings move creates an unnatural dip after earnings; too low creates a spike. The correct assumption produces a smooth power law curve.

Step 3: Record Your Assumptions

For each extraction, document: Ticker, Earnings date, Assumed move size (%), Term structure fit quality (R²), Your confidence level (tight/loose)

Step 4: Run Cross-Sectional Analysis on Clean Vols

Now compare:

• AAPL: 35% IV (no adjustment needed)

• NVDA: 44% base vol (extracted from 48% dirty vol with 6.5% earnings move)

Calculate percentile rankings using the clean vols for all four dimensions: IV percentile (using base vols), RV percentile, VRP (base IV - RV), and Term structure steepness (using base vol term structure).

Step 5: Understand What You’re Betting On

When you identify NVDA as “cheap” after extraction, you’re making TWO assumptions: (1) Base vol of 44% is cheap relative to history, and (2) Market will continue pricing ~6.5% earnings move (your assumption holds).

The Cross-Sectional Edge

By extracting events, you accomplish two things:

1. Expand your opportunity set: Instead of excluding 30-40% of your universe during earnings season, you can analyze everyone on equal footing

2. Identify hidden opportunities: Sometimes the “expensive looking” ticker with earnings is actually cheap on a base vol basis, or vice versa

The market often prices earnings mechanically (historical average moves), but base vol can be at extremes. Finding names where base vol is at the 5th percentile but dirty vol looks “normal” because of earnings—that’s where edge lives.

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Stay groovy

☮️

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