Video Deep Dives
What Is Implied Volatility? Why Options Are So Expensive Before Earnings
Earnings hit, the stock rallied — and your call lost money. The problem is not direction: you overpaid for "it will move a lot" the moment you bought. IV and IV crush, explained.
Right on Direction, Still Losing Money
Nearly every options beginner steps on this rake: bullish into earnings, buy a call beforehand. Earnings land, the stock actually rises, you open the account — the stock is up and your call is down.
Direction was never the problem. The moment you bought, you had already paid a steep price for "earnings will move this stock." That invisible price is implied volatility (IV).
What IV Actually Measures
One sentence: IV measures how much the market expects the stock to move — not which way. It is a percentage; the bigger the number, the wilder the expected swings.
Crucially, that expectation is priced directly into the option. Part of every premium buys not direction but magnitude of movement. The more movement the market expects, the more that part costs.
So an option buyer is betting on two things: direction, and whether realized movement can beat the expectation already priced in. Direction is only half the battle.
The Analogy: IV Is an Insurance Premium
Which house costs the most to insure? The one in the flood zone during hurricane season. More risk, more uncertainty — higher premium.
Options work identically. Right before earnings, nobody knows whether the stock will soar or crater — uncertainty maxes out, the "premium" (IV) inflates, and options get expensive.
That is why pre-earnings options always look absurdly priced: you are not overpaying for direction; you are buying when the premium is at its peak.
IV Crush: The Premium That Evaporates Overnight
The moment earnings print, the big uncertainty vanishes. No more guessing — and the sky-high IV collapses overnight. The phenomenon has a name: IV crush.
Feel it in numbers: stock at $100, pre-earnings IV at 80%, you pay $8.00 for a call. Earnings land, the stock climbs to $103 — but IV crushes from 80% to 30%. Your call falls from $8.00 to $6.00. The stock gained $3; you lost $2.
That is the kill shot: perfectly right on direction, beaten by a premium that evaporated overnight.
Before earnings
Stock $100, IV 80%, call at $8.00
After earnings
Stock $103 (direction correct)
IV
80% → 30% (crushed)
Option price
$8.00 → $6.00: stock up, option down
How to Actually Use IV
First, never read the absolute number alone. Is 30% high or low? Compare it to the stock’s own history — that is IV Rank (or IV Percentile): where today’s IV sits within its one-year range. The expected-move ranges in our weekly volatility report are derived precisely from IV.
Second, the master rule: high IV favors sellers, low IV favors buyers. Buyers pay the premium — the pricier, the worse. Sellers collect it — the pricier, the better.
So before buying that pre-earnings option, ask one question: can the actual post-earnings move beat the move the market has already priced? If not, even a correct direction just pays the seller’s rent.
Key takeaways
- An option’s price = direction + expected movement (IV). IV is the insurance premium — pricier when uncertainty peaks.
- Earnings land → IV crush: the real culprit behind "right but losing."
- Judge IV by its relative position (IV Rank), never the raw number.
- High IV favors sellers, low IV favors buyers — pick your side accordingly.
- Our weekly volatility report turns IV into expected ranges — sign up free to see every ticker.
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