We usually see a volatility crush begin after big scheduled events like quarterly earnings reports or a presidential election. In the past couple of weeks, we’ve seen the release of fourth-quarter earnings (there are 1,307 this week) — setting up many opportunities for investors to profit from an implied volatility crush after earnings.
Earnings season is a smart way for investors to catch a glimpse of how well a stock is going to perform based on how well-off or bad-off the company is.
And the forecasts leading up to an earnings report being released plays a huge role in why implied volatility in options tends to be so high prior to the announcement, and then it falls sharply afterwards — causing a volatility crush.
A volatility crush happens when an option’s price suddenly plummets because investors expect the underlying stock will perform poorly. If you trade options, learning how this complex concept works can save you a lot of money from losing trades in the long run.
Volatility crushes are caused by fast, sharp drops in implied volatility — after things like an earnings event — that prompt a similar fall in options values. Implied volatility is like a forecast of an option’s potential value. The higher implied volatility is, the higher the option’s price will be. On the other hand, when implied volatility falls, so does the option’s price.
And the bigger the volatility crush, the more likely an investor can profit big-time… or lose massively.
In today’s video, we’ll cover how to profit from an implied volatility crush after earnings.
When we look at the options market, you’ll notice it’s made up of supply and demand. When there’s more of a demand for options prices, calls and puts, the implied volatility will expand.
Conversely, when there’s more supply than demand, implied volatility will drop.
Stocks that are constantly moving throughout the day — I’m talking about names like Tesla, Netflix and Apple — usually have high implied volatility year-round. And then you have individual stocks that will experience high volatility around unknown events like earnings, or news .
For example, if you take a look at the Apple Inc. (Nasdaq: AAPL) chart around the time its most recent two earnings reports were released, you’ll notice implied volatility is high, and then it drops.
Since higher implied volatility means the option will cost more and vice versa, you’ll often hear people say to sell options ahead of earnings. This is so you can profit off the volatility crush that follows — if it’s within the market maker’s implied move.
But is that actually true?
Watch today’s video to find out how you could profit from an implied volatility crush after earnings. As always, leave your thoughts in the comments below, and don’t forget to subscribe to my YouTube channel to stay up to date with all things options trading.