Market lesson · Market lessons
IV crush after earnings
Options price in the unknown.
Before earnings, traders buy options because no one knows which direction the stock will move. That demand pushes implied volatility up. The option becomes more expensive than its intrinsic value alone would justify.
High IV rank means you are paying a premium.
iv rank at 78 means current implied volatility sits 78% of the way between its one-year low and high. The needle sits in the expensive zone. Buy options here before earnings and the crush will erase most of that premium the moment the news is out.
This one is an animated diagram in the app. See it in Vero.
The announcement resolves the uncertainty.
Once earnings are out, the uncertainty collapses and IV drops sharply. This is IV crush. Long option holders lose the volatility premium they paid, even if the stock moved in their direction. A stock that moves 4% when the option priced in 8% leaves call buyers with a loss.
You bought a call before earnings. The stock beat estimates and rose 3%. Your call lost value. The most likely reason is:
Show the answer
A. Implied volatility collapsed after the announcement. The option priced in a larger move. When the actual move was smaller, IV collapsed and erased the premium.