Most traders think earnings season is all about guessing whether a stock will go up or down. But there’s a powerful, often overlooked market force at work behind the scenes — one that quietly crushes option prices the moment earnings are announced.
It’s called implied volatility — and if you don’t understand how it behaves, it can ruin your trades before you even realize what happened.
But here’s the good news:
If you know how to spot this volatility shift, you can turn it into a reliable source of profits. In fact, it’s the core reason why strategies like the CandleChasers earnings trade work so consistently.
📊 What Is Implied Volatility (IV)?
Implied volatility (IV) is the market’s estimate of how much a stock is likely to move over a specific period of time. It’s expressed as a percentage and calculated based on the current prices of options in the market.
But here’s the key part — IV doesn’t predict which direction the stock will move. It only tells you how much movement traders are expecting, whether that’s up or down.
For example:
- If a stock has an IV of 30%, the market expects the stock to move 30% up or down (on an annualized basis).
- Higher IV means traders are anticipating bigger moves.
- Lower IV means they expect smaller, quieter price action.
In short:
IV = the market’s mood meter about potential stock movement.
And nowhere does IV rise and fall more dramatically than around earnings announcements — because these events introduce short bursts of uncertainty and excitement into the market.
💰 How IV Impacts Option Prices
Option prices aren’t random. They’re based on a combination of factors like:
- The stock’s current price
- Strike price of the option
- Time remaining until expiration
- Interest rates
- Dividends
- Implied volatility
Among these, IV has a huge impact on how expensive or cheap an option is.
Here’s how it works:
- When IV rises, option prices go up — because higher expected movement means more risk for the option seller.
- When IV falls, option prices go down — because there’s less risk and uncertainty.
📝 Why?
Options are a bet on movement. The more the market thinks a stock might move, the more valuable those options become (because there’s a higher chance the option will end up in-the-money).
That’s why in the days leading up to an earnings report, IV tends to increase significantly — because nobody knows for sure how the market will react to the company’s news. This makes options more expensive.
🎯 What Happens to IV After Earnings?
Once a company releases its earnings:
- The uncertainty is removed.
- The “big reveal” has happened.
- The market now knows the numbers and guidance, and can react accordingly.
As soon as the earnings report drops, something called a volatility crush (or “vol crush”) typically occurs.
Here’s what happens:
- Implied volatility drops sharply — sometimes cutting in half or more — within minutes of the announcement.
- Option prices quickly decline, not necessarily because of stock price movement, but because the expected future movement is now much lower.
- Even if the stock moves a lot, the collapse in IV can heavily reduce the price of the options.
This predictable pattern is why selling options before earnings and closing after can be profitable — especially with a strategy like selling straddles.
📈 Why IV Matters for Earnings Trades
When you trade options around earnings, understanding how IV behaves is the difference between a good strategy and a losing one.
Here’s why it’s so important:
- Before earnings:
IV rises because nobody knows what the earnings report will say. The possibility of a big move inflates option premiums — sometimes dramatically. - After earnings:
IV almost always drops, because the uncertainty is over. Option prices fall as a result, sometimes losing a huge portion of their value overnight.
If you’re selling options (like in the CandleChasers earnings strategy), this IV drop works in your favor.
You:
- Sell high (when IV is inflated before earnings)
- Buy back low (after IV drops post-earnings)
This works even in cases where the stock makes a decent move — because the vol crush can often offset the price move in the options themselves.
📌 Example: How IV Can Make or Break a Trade
Let’s say a stock is trading at $100, and the options market is pricing in a 10% expected move after earnings.
You decide to sell an at-the-money straddle:
- Sell the $100 call
- Sell the $100 put
You collect a large premium because:
- IV is very high going into earnings.
- The market expects a big move.
After earnings:
- The stock moves only 5% to $105.
- Implied volatility collapses from 70% to 30%.
Now:
- Even though the stock moved, the sharp drop in IV reduces the option prices dramatically.
- The total value of the call and put you sold falls, and you can buy them back for a profit.
This is how strategies like selling straddles into earnings capitalize on the predictable nature of implied volatility.
✅ Why This Matters for Your Next Earnings Trade
Implied volatility is one of the most important factors in earnings options trades.
It directly affects how expensive options are before earnings — and how much they drop in value afterward.
Understanding how IV works gives you an edge, especially when using strategies like the CandleChasers earnings trade:
- Sell options while IV is inflated.
- Buy them back cheaper after the volatility crush.
- Profit from both time decay and the IV drop — regardless of whether the stock moves.
If you’re serious about trading earnings with options, make sure you learn to watch and use implied volatility to your advantage.