Implied volatility is the invisible tax of the options market. Most traders don’t see it coming. They buy contracts into earnings, confident they’ll make money if the stock moves their way. Then the event hits, the stock pops, and their options bleed red. That’s IV crush — and it’s brutal.
Here’s the truth: the market is never giving away free money. Everyone knows earnings are coming. Everyone knows the stock could move. That risk is already priced into the options. The premium balloons before the event, and the second the announcement is out, that balloon deflates. It doesn’t matter if the stock goes up. If it doesn’t move more than the inflated expectation, you lose.
Example: a stock sits at $100. Earnings tomorrow. The $100 calls are trading at $5. You buy them, earnings come in “good,” and the stock rallies to $103. You’re right on direction, but your calls are suddenly worth $3, not $8. Why? Because the risk premium is gone. The market priced in a bigger move, and you didn’t get it. That’s IV crush at work.
The way around this isn’t complicated. Don’t pay top dollar for risk that everyone else already sees. If you’re going to trade events, structure spreads so you’re selling part of that inflated premium, not just buying it. Or trade the stock itself and keep it simple. Sometimes the smartest play is to sit out and wait until after the event, when IV normalizes and options are cheaper again.
Bottom line: if you don’t respect implied volatility, the market will take your money no matter how “right” you are. IV crush is the silent killer of retail accounts, and the only way to beat it is to stop donating premium into events that are already priced in.