Good morning all, I’ll keep this simple and to the point. If IV crush is a legit threat when buying an option in a high IV environment. Would the counter play to this not be purchase the option a week or two before high iv, then the iv will drive the price up and then you sell. (I’m thinking earnings, buy an option well before earnings and sell the day prior/day of if it’s after market)
What am I getting wrong here?
Buy while IV is low, sell while IV is high…. Right?
byu/Sufficient_Yak_1939 inoptions
Posted by Sufficient_Yak_1939
6 Comments
Earnings IV move can go against you even more than the market makers show. so calculate the risk loss over earnings so no surprise if it does down also check past earnings movement for some historical IV and price movements
Unfortunately it’s not as predictable as that.
No. That’s wrong. Buy when IV < RV. Sell when IV > RV.
What you’re not getting is that an option that coincides with an earnings date will already have that uncertainty baked into its price, regardless of when you buy it.
You’ve got it absolutely right. You want to buy options when IV is low and sell them when IV is high. It doesn’t have to be related to earnings. There’s other factors that cause spikes and troughs in IV that can be capitalized on.
The rise in IV of an option when approaching earnings is an indirect effect of the upcoming earnings event. Since the days until expiration decrease while the total implied variance of the option (the expected variance of the underlying price until the expiration date of the option) stays almost the same (because the known driver of variance aka the earnings release is still on the horizon), the **annualized** IV rises. So you should buy if you think the total implied variance (or ivol) is too low and vice versa.