Implied volatility and IV crush
1In one sentence
Implied volatility (IV) is how big a move the market expects. Before big news it rises, making options expensive. After the news it falls fast. That drop is IV crush.
If you buy options right before earnings, you pay for that expected move. The stock has to move more than expected just to break even.
2Try it: buy before earnings
Example: NVDA is $215 the day before earnings. You buy a $220 call with 3 days left. IV is 85%. The next day, earnings are out.
Prices from the Black-Scholes model with example numbers. Real prices also depend on supply and demand.
33 words to know
Implied volatilityIV %
The market's guess at how much a stock will move, built into option prices. Higher IV means pricier options.
IV crushafter news
The quick drop in IV once an expected event (earnings, a ruling, a launch) has happened.
Expected move± $
The move options are priced for. If the stock moves less than this, option buyers usually lose.
4Watch out
- Up isn't enough. After earnings, a call can lose value on a small move up, because the IV it was priced on disappears.
- High IV cuts both ways. Sellers collect more premium before news, but take on the risk of a bigger-than-expected move.
- Check the IV first. Before buying options, compare today's IV with its usual level. Unusually high IV means you're paying extra.
5Quick check · 3 questions · optional
Common questions
What is IV crush?
IV crush is the sharp drop in an option's implied volatility after an expected event like earnings. It lowers option prices, so buyers can lose money even if the stock moves their way.
How do you avoid IV crush?
Avoid buying options right before known events, use spreads that sell some volatility back, or trade after the announcement once IV has dropped.
What is implied volatility?
Implied volatility is the size of move the options market expects, expressed as a yearly percentage. It's worked out from current option prices.
Education only. Examples use illustrative numbers. Not financial advice; you make your own decisions.