Lesson Overview

Earnings IV Crush

Before you start making earnings trades it's important to understand the "why" behind what we do. In general, we make earnings trades to potentially profit from an IV crash that happens following the company's announcement.

Before a company announces earnings you will generally see the implied volatility of its options increase as the one-time binary event draws closer. After the event has occurred, there is less fear or unknown in the market and therefore implied volatility will drop quickly for the underlying options.

As traders we can tailor specific options strategies to profit from this one time event in any stock. In this video we’ll show you some examples to prove the IV crush theory.

More Discussion

Was This Helpful? Add Comments/Questions

  • Mookie S

    Nice summary.

  • Steve

    It would seem to me that the customary pricing guidelines of credit = %ITM x spread would likely be relaxed in the case of earnings trades? Since they are so short term. Or should I be sticking to that on earnings trades too?

    • Correct – it’s more about getting beyond the expected move.

  • Good question – my answer is that you don’t know where a stock will open so it’s best to always play it neutral. Even stocks that look like they are “trending” can gap higher or lower against the trend.

  • Yeah they do a bad job of not showing it unfortunately.

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