An earnings report is a scheduled jump. On one known night the stock will gap, and everyone knows the date. Options that expire before the report do not contain the jump; every option that expires after it does. That single fact bends the term structure, and reading the bend is one of the most useful skills in this course.
The bump
Think of IV as the average movement an option will see over its life. Ordinary days each add a little; the earnings night adds a lot in one go. The first expiration after the report holds the whole jump inside a short life, so its IV is pushed up hard. A later expiration holds the same jump spread over many more days, so it is pushed up less. Put those together and the curve shows a bump at the expiration that contains the date, then slopes back down toward normal. On a stock with a big report the bump can sit 15 or 20 points above the expirations either side of it.
A stock at a steady 30% with a report 40 days out, priced for an 8% move. Every expiration after the report jumps above the dashed line without the event, and the jump fades with time. Drag the move to zero and the bump disappears.
The size of the bump depends on where the report sits, as well as on the move priced for it. The same 8% move adds about 8 points to a 40-day option on a 30% stock, and more than 25 points to a 10-day one, because the short option has fewer ordinary days to dilute the jump. That is why the week before a report is when the front of the curve looks most extreme, and why it drops so hard the morning after.
The same stock and the same 8% move with the report 10 days out. The first expiration after it carries a spike far taller than the one in the chart above. Halve the move and see the spike shrink by much more than half its height.
The implied earnings move
Take the extra IV out and turn it into a stock move and you get the implied earnings move: how far the market is pricing the stock to move on the report, as a percent of the price. Say a stock at $500 has an implied earnings move of 8%. The market is pricing a $40 swing either way, and the options that expire just after the date are priced for it.
Compare that with what the stock has actually done on past reports. If the average of its recent reports is 5%, the options are asking for more than history has delivered, and whoever sells the event is being paid above the average. If the average is 10%, the options are cheap against history and the buyer has the edge. Neither is a guarantee. It is a comparison, and it is where every earnings trade starts.
The clean curve
Because the event dominates the front of the curve, the ordinary term structure disappears behind it. The data vendor solves this by estimating the event's share of each tenor's variance and stripping it out. What is left is the ex-earnings IV: the volatility the options imply for the days that are not the report. On a stock with 45 days to earnings, the 30-day tenor is clean, while the 60-day and 90-day tenors carry the event. So the ex-earnings line sits under the headline line from 60 days out, and the gap between the two is the event premium in points. That clean curve is the one to compare with realized volatility, and the one to use when you ask whether the stock's options are expensive apart from the report.
Fed days, CPI and jobs reports
An index has no earnings night, but it has a calendar. The Fed announces a rate decision on a known afternoon eight times a year, the CPI inflation report comes out before the open each month, and the jobs report usually lands on the first Friday. Each is a scheduled jump for the whole market, and it bends SPY's term structure the way a report bends a stock's: the expiration that settles on or just after the release carries the extra variance. The bump is smaller, because an index move on a Fed decision day is often one and a half to two times an ordinary day's. But SPY lists an expiration every trading day, so in Vol Snapshot's Term structure panel the one on release day often sits a little above its neighbors. The Economic Calendar panel lists the dates. The dashed ex-earnings line strips out company reports only, so these bumps stay in. Trading those same-day expirations gets its own lesson in Module 15.
The maths: backing the move out of two expirations
Work in total variance, IV squared times years. An expiration after the report holds the ordinary days plus the jump: v² T = b² T + E², where b is the ordinary (ex-earnings) volatility and E is the earnings move as a fraction, one standard deviation. That is exactly the rule the charts use.
Two expirations after the date give two equations with two unknowns. Subtract them and the jump cancels: b² = (v2² T2 - v1² T1) / (T2 - T1). Then E² = v1² T1 - b² T1.
Worked example. The 10-day expiration shows 60% and the 38-day shows 40%, and the report falls before both. v1² T1 = 0.36 × 10/365 = 0.00986 and v2² T2 = 0.16 × 38/365 = 0.01666. The difference, 0.00680, over 28/365 = 0.0767, gives b² = 0.0886, so b is about 29.8%. Then E² = 0.00986 - 0.0886 × 10/365 = 0.00744, so E is about 8.6%. The options are pricing an ordinary volatility near 30% plus a one-standard-deviation report move near 8.6%. If one expiration sits before the report, it gives b directly and the sum is simpler still.
The average size of a move drawn from a bell curve is about 0.8 of its standard deviation, so the same prices imply an average absolute move near 6.9%. Vendors differ on which of the two they print, so compare an implied move with past moves measured the same way.
Your turn
Open the Dashboard for META and read the days to the next report and the implied earnings move. Then open Earnings & Events for the same stock and find the average move it has actually made on past reports. Then open IV Intelligence for NVDA and read the front of its term structure. Finally find the next Fed or CPI date on the Economic Calendar and look for the SPY expiration that holds it in Vol Snapshot.