Abstract: The Post-Earnings Announcement Drift (PEAD) anomaly refers to the tendency of stock prices to continue drifting in the same direction as earnings surprises well through the subsequent earnings announcements; ignoring the autocorrelations in extreme earnings surprises across adjacent quarters. Currently, the two major competing theories to explain PEAD are: the risk premium hypothesis (RPH), which argues that the anomaly exists only because risk has been measured improperly; and, the under-reaction (behavioral) hypothesis (URH), which assumes investors do not completely utilize the auto-correlations of earnings surprises. We test the former (RPH) by using a finer metric for risk than used in prior research, namely, the change in implied volatilities obtained from options prices immediately before and after the earnings announcements. Inconsistent with the predictions of RPH: (1) we do not find a positive correlation between the implied volatility changes and earnings surprises; and (2) we find that implied volatilities (risk) actually decrease most after the earnings announcements for firms with the most positive earnings surprises. Using volatility based option trading strategies (straddles), we examine if option traders have a similar URH bias to those of equity traders. We find that option straddles based on extreme earnings surprises in the prior quarter are not more profitable than straddles on mild earnings surprises, indicating that option traders already incorporate the prior earnings surprise in option prices.