Earning season

The publications made during this period called the 'earning season' are a legal obligation which allows investors to assess the financial health of companies.

Prices are very sensitive to these announcements with regard to the objectives announced by the companies and the forecasts of financial analysts. If results exceed these targets - and therefore investors' expectations - the price of the security in question tends to increase.

There are generally two situations:

• The investor holds the security in his portfolio: he seeks to hedge the downside risk by purchasing a downside hedge (purchase of a put option);
• The investor does not hold the security in his portfolio: if he anticipates good financial results, and therefore an increase in the price, he buys a call option by paying a premium. Conversely, if he anticipates a fall in the price, he buys a put option.

In both cases, the investor is buying an option. As buying an option is equivalent to buying volatility, the latter naturally tends to increase as the publication of results approaches.

Once the results are published, investors unwind their positions by selling the options purchased previously. Mechanically, volatility will therefore tend to fall - even though poor results usually lead to a fall in the stock and therefore an increase in volatility.

To learn more about the connection between volatility and structured products, head to this guide.