Understanding How IV Crush Works

1. Understanding How IV Crush Works Implied volatility is considered to be a very important component in the options’ extrinsic value portion of the premium. When IV is relatively high, the options market is pricing in the potential for a great deal of fluctuation in the underlying equity’s price during the lifetime of the option. This causes option premiums to inflate. Conversely, when IV is relatively low, the options market is pricing in the idea that the equity will move much the way it has in the past – nothing unusual expected – and premiums on options will be lower.

2. It is news that affects the market as a piece of whole or equity- specific news. Many – if not most – equities share a repeatable pattern when it comes to IV. Ahead of a company’s earnings announcement, IV will typically rise – potentially dramatically – as the options market attempts to price in the sort of wild, quick movement that may occur in the price of the shares as a result of the “report card” given in the earnings information. This swell in IV is seen most dramatically in sthe options series – whether weekly or monthly – that contains the earnings announcement. Once the announcement is made, the options experience IV crush– a dramatic deflation of the IV balloon of premium. Those options that saw the biggest swell in premium are the very ones that crush the most dramatically. When it comes to buying and selling options, the idea is to buy options

3. when IV is low and likely to go higher and to sell options when IV is high and likely to go lower. You can construct a calendar spread trade to take advantage of this differential in IV crush. The expert at OptionsGeek can help you find the best options trading strategy to maximize profits. Learn more on www.optionsgeek.com.