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Implied volatility & IV crush
Why options get expensive before events and collapse after.
10 min · Beginner
What you'll learn
- Explain what implied volatility measures and why it changes option prices
- Estimate the market's expected move from IV or from the at-the-money straddle
- Recognize how IV crush can cause a loss even when the stock moves your way
Key takeaways
- Implied volatility is the market's estimate of future movement, and it drives extrinsic value.
- A rough expected move is stock price x IV x the square root of (days / 365).
- The at-the-money straddle price is a quick estimate of the move priced in for an event.
- After earnings, IV usually collapses, which can cause a loss even when the stock moves your way.
- Long options through events pay only if the move beats what was already priced in.
Glossary
- Implied volatility (IV) — The market's annualized estimate of future price movement, derived from option prices.
- IV crush — A sharp drop in implied volatility after a known event, which shrinks extrinsic value.
- Straddle — An at-the-money call and put with the same strike and expiration; its price estimates the expected move.
- IV rank — A reading that compares current IV with its range over the past year.
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