  Earnings announcements (EADs) are corporate events that provide investors
with fundamentally important information. The prospect of stock price rises may
also contribute to EADs increased volatility. Using data on extremely short
term options, we study that bimodality in the risk neutral distribution and
concavity in the IV smiles are ubiquitous characteristics before an earnings
announcement day. This study compares the returns between concave and non
concave IV smiles to see if the concavity in the IV curve leads to any
information about the risk in the market and showcases how investors hedge
against extreme volatility during earnings announcements. In fact, our paper
shows in the presence of concave IV smiles; investors pay a significant premium
to hedge against the uncertainty caused by the forthcoming announcement.
