Unit 4 · Level 1 · Buying options well
Earnings & the IV crush
The Trading course warned you about trading into earnings. Options add a twist. Before a known event, IV inflates: everyone wants movement, so movement gets expensive. The moment the news lands, uncertainty dies and IV collapses. That's the famous IV CRUSH. Buy the night before and you can nail the direction yet still lose, because you paid peak prices for volatility that evaporated at 9:31.
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What you get asked
You buy a call the day before earnings. The company beats and the stock jumps 4%, yet your call loses money. Why?
You were long delta AND long volatility. The delta bet won; the bigger vega bet lost. Net: red. This is the vol trap in its purest form.
Put the IV cycle around earnings in order.
The cycle repeats every quarter, on schedule. Sellers of pre-earnings premium are betting on exactly this rhythm.
Once an event resolves, implied volatility usually ___ sharply.
IV is the price of uncertainty, and the announcement just deleted it. What's left to pay for melts out of the premium within minutes.
To profit from buying options through earnings, the stock's move must…
The chain quotes an implied move before every event. Direction alone isn't the bet: you're betting the real move beats the priced one.
The pre-earnings premium spike is best understood as…
Everyone can see earnings on the calendar, so the expected jump is in the price before you arrive. Paying up isn't wrong; paying up unknowingly is. 🐜
The rest of this unit
Defined risk, lottery tickets and IV crush: buy movement without burning the account.