Options IV – Curious Finding Out When it ‘Rushes’ and How it can Help Profits

I recently provided an educational piece on Implied Volatility (IV), what it is and how it is a key part of the pricing of options, and a couple of strategies one can consider once the determination of the IV is either Expensive or Cheap.

Now, I am going to provide education on how, in many cases, Implied Volatility increases on stock options the closer the stock gets to its earnings announcement. I am going to use a Long Call strategy example to teach this.

The situation is known as or called an Implied Volatility Rush or IV Rush.

 It is available to many options traders when one anticipates an option may go from a situation where it is cheap or low right now but will get expensive or high before it expires.

The reason that could be beneficial and profitable for an options trader is that a low or cheap IV option can increase in value when its IV ‘rushes’ higher.  That should result in the options trader being able to cash out for a profit.

What is a Reason IV Rushes Higher?

There are various reasons options on a security can increase. Anticipation of a company’s new product release, upcoming or pending approval on a new drug for a pharmaceutical company, (which, technically could be considered a new product release for that company, I guess), or earnings.

When a company is due to report their earnings there tends to be an increase in he options implied volatility (IV). The reason attributed to this situation happening is because investors and traders are uncertain about what the company will report for both their earnings and their revenue, both what they achieved and what is called their forward-looking guidance.

This can result in potential increases in the value of the options premiums. On the whole, demand for the options may increase, which drives up the price of those options and a factor for that happening is the increase in the IV.

Example of IV Rush on Johnson & Johnson (NYSE: JNJ)

Below is a chart on JNJ dated January 06, 2025 

When you look at the otpions data notice the IV% at this date is 27.95 and the options is priced at $3.25.

Advance the time to January 21, 2025 which is the day before earnings are announced and you can see a surge in price of the option and the increase in its IV%.

Notice the profit (yes, the price increase of the underlying helps the price of the option increase), the rate of return % and the IV % all increased.

There is more that can be studied such as the number of quarters prior to and post earnings reports and not only whether the earnings reaction was negative or positive, the % increase or decrease for each and  even an ideal number of days prior to the earnings report would be the optimal day to initiate a bullish or bearish options trade.

I welcome you all to reach out to  my support team to pursue the means to obtain further education and software analytics to aid you in options trading around earnings.

App: Toms Option Tools

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