Implied Volatility Reaction to Earnings Announcement

Hard Option Valuation Implied Volatility

In the context of option pricing, implied volatility (IV) represents the market's forecast of a likely movement in the underlying asset's price. Various factors affect the IV of options including market conditions, earnings announcements, and macroeconomic events. Assume a particular call option on stock XYZ has a current implied volatility of 25% and is based on the Black-Scholes model. If the underlying stock's price moves closer to its historical average volatility of 30% post-earnings announcement, and the market reacts negatively, which of the following statements is true regarding the implied volatility for this call option?

The implied volatility will likely increase due to greater uncertainty in the stock's future performance.

The implied volatility will likely decrease as the stock's price approaches its historical average volatility.

The implied volatility will remain unchanged regardless of the stock's price movement.

Hint

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