Options concepts
Implied volatility and IV crush.
Two traders buy calls on the same stock before an earnings report. The stock rises after the report, and both are surprised to see their calls worth less than they paid. The explanation is almost always implied volatility, the part of an option's price that reflects how much movement the market expects. This guide explains what it is and why it changes.
What volatility means in options
Volatility measures how much a price tends to move, regardless of direction. There are two kinds that matter here:
- Historical (realized) volatility describes how much the stock actually moved over a past period.
- Implied volatility (IV) is forward-looking. It is the volatility figure that, when plugged into an options pricing model, produces the option's current market price. In other words, it is what the market is implying about future movement.
IV is expressed as an annualized percentage. An IV of 32% means the market is pricing in a one-standard-deviation move of roughly 32% over a year. For shorter periods, you can scale it by the square root of time: over about one month, 32% annualized works out to roughly 9% (32% ÷ √12).
Why IV changes option prices
More expected movement means a greater chance that an option ends up valuable, so sellers demand more premium. Higher IV raises the price of both calls and puts; lower IV lowers both. The sensitivity of an option's price to IV is called vega, one of the options Greeks.
Only the time value of an option is affected by IV. Intrinsic value, the part an option would be worth if exercised now, does not depend on volatility. That is why long-dated, at-the-money options, which are almost all time value, are the most sensitive to IV changes.
Events and the volatility cycle
IV tends to rise ahead of scheduled events with uncertain outcomes:
- Quarterly earnings reports
- Federal Reserve rate decisions and major economic data
- Product launches, regulatory decisions and court rulings
Once the event passes, the uncertainty is resolved and IV usually falls, sometimes dramatically, within minutes of the next open. This drop is called IV crush.
IV crush: an illustrative example
A stock trades at $100 the day before earnings. A $100 call expiring in a week costs $4.50, with IV at 85%. After the report, the stock opens at $103, and IV drops to 35% because the big unknown is gone.
- The call now has $3 of intrinsic value ($103 − $100).
- With much lower IV and less time left, its remaining time value might be well under $1.00.
- The call is worth roughly $3.70, below the $4.50 paid, even though the stock moved up 3%.
The market had priced in a larger move than the one that happened. For the call buyer to come out ahead, the stock needed to move more than the market expected. These numbers are illustrative; real outcomes depend on the specific contract and market conditions.
The expected move
Options prices around an event imply an “expected move.” A common rough gauge is the price of the at-the-money straddle (an at-the-money call plus an at-the-money put with the same expiration). If that straddle costs $6 on a $100 stock, the options market is pricing in a move of roughly ±6% by expiration. It is not a prediction of direction or a guarantee of size; it is simply what the market is charging for uncertainty.
IV rank and IV percentile
A stock's IV only means something in context. A volatile growth stock might normally trade with IV around 60%, while a utility might sit near 20%. Two common tools put current IV in context:
- IV rank shows where today's IV sits between its 52-week low and high.
- IV percentile shows the share of days over the past year when IV was lower than today.
Either one helps you tell whether options on a stock are currently cheap or expensive relative to their own history.
Why this matters for options alerts
When you read an options alert, it is worth checking whether a scheduled event falls before the expiration date. If one does, the contract's price includes event volatility that will likely disappear afterward. That affects how the option is likely to behave regardless of the stock's direction, and it is one reason two alerts with similar charts can produce very different outcomes.
Every alert in our app is tracked to its close, and the full record of the last 200 closed alerts is on the Results page, including the ones where the outcome was a loss.
Key points
- IV is the market's price for uncertainty. It is not a forecast of direction.
- Higher IV makes options more expensive; IV crush can erase gains from a correct directional call.
- Known events typically lift IV before and lower it after.
- Context matters: compare IV with the stock's own history using IV rank or percentile.
Not financial advice. Options involve risk and are not suitable for every investor. See our Risk Disclaimer.
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