What is IV crush in options?

IV crush is the sharp fall in implied volatility that often follows a scheduled event such as an earnings report. Before the event, option prices carry extra value for the uncertainty. Once the news is out that value drains away, so calls and puts can both lose value even when the stock moves.

Should you sell a call option before earnings?

Selling before the report locks in whatever the call is worth and avoids the drop in implied volatility afterward. Holding through is a bet that the stock will move further than the options market already expects. With no view on the size of the move, closing before the report is the simpler choice.

How much value does a call option lose each day?

The daily loss from time decay appears as theta on most option chains, quoted in dollars per share per day. It is small for options with months left and speeds up in the final weeks before expiration, which is why short-dated calls need the stock to move quickly.

Why Did My Call Option Lose Money When the Stock Went Up?

Q: Why Did My Call Option Lose Money When the Stock Went Up?

Usually for one of three reasons: time decay ate part of the premium, implied volatility fell after an event such as earnings, or the stock moved less than the options market had already priced in. A call needs the stock to beat its cost, which sits above the current price.

The report came out after the close. You’d bought a call that afternoon for $3.00. The stock opened 2% higher the next morning and the quote now says $2.20. You were right about the direction and you’re down $80 on the contract.

Nothing went wrong with the order. The price you paid had assumptions built into it. The morning after the report, most of them came due at once.

What was in the $3.00 you paid?

An option’s price has two parts. Intrinsic value is what the call would be worth if you exercised it right now: the stock price minus the strike, or zero if the stock is below the strike. Everything else is extrinsic value, the part you pay for time and for the chance of a large move.

Before an earnings report, extrinsic value swells. Buyers want exposure to the gap, sellers want to be paid for taking the other side, and the price of that uncertainty goes into implied volatility. Once the report is out, the uncertainty is gone, implied volatility falls, often sharply, and the extrinsic value that was riding on it drains out of the options on that stock, calls and puts alike, whichever way the shares moved.

The 2% gain added some intrinsic value. The fall in implied volatility took away more.

Which of the three causes was it?

Usually a mix. They’re worth separating because each one points to a different fix.

Time decay is the steady one. Every day that passes, the option has less time left for something to happen, and extrinsic value leaks out. It runs faster in the last few weeks before expiration and it runs over weekends too, so a short-dated call can bleed value even while the shares climb slowly.

A drop in implied volatility is the sudden one. Earnings, a drug trial result, a court ruling: any scheduled event where the uncertainty resolves on a known date tends to leave implied volatility lower afterward. That’s the effect people call a volatility crush.

The third cause is the easiest one to miss. The options market had already priced a move of a certain size. If traders expected the stock to move 6% on the report and it moved 2%, the call was priced for a bigger outcome than the one that arrived, and you paid for the difference. Options have usually priced the earnings move already, which is why being right about direction isn’t enough.

Where does the call actually break even?

At expiration, a call breaks even at the strike plus the premium you paid. A 50 call bought for $3.00 needs the stock above $53 at expiry just to get your money back. That level is above the current price by design, so the call can be down on a rising stock and keep sliding as time passes, as long as the stock stays short of that line.

Before expiry the picture is looser, since some extrinsic value remains. It still fades toward zero.

What should you check before buying a call?

Three things, and they take a few minutes.

Implied volatility against its own range. Compare the current reading with where it has traded for that stock over the past months, since a high reading means you’re paying up for the move.
Days to expiration. Ask whether your idea has enough time to play out, then add some, because being early and being wrong look the same on the expiration date.
The expected move. Work it out as price x implied volatility x the square root of days/365, or use the expected move calculator, and ask whether you think the stock will move further than that.

What can you do about it next time?

Buy more time. A longer expiration loses less value per day, and its price is less dominated by one event, so the post-report drop in implied volatility takes a smaller share of it. Buying more time than your idea needs sets out the argument.

Use a spread. Pair the long call with a short one at a higher strike, same expiration. The call you sell is also inflated before the event, so you collect some of that volatility back, and when implied volatility falls after the report the short leg loses value too, which offsets part of the damage to the long leg you own. The trade-off is a capped gain above the short strike.

Or buy after the event. Once the report is out, implied volatility has usually reset, and you’re paying for time and direction without the event premium on top.

Each fix gives up some upside. In return, being right about direction is more likely to pay. For more on how option prices behave around events, see the options desk.