Posted in
Education
By: Tom Gentile
on July 17th, 2025
The Biggest Concern Trading Options Around Earnings: Implied Volatility
It is easy to get caught up in watching the price action of securities during earnings season. To see a stock price explode higher post their earnings announcement is fascinating to watch, especially if you own it. It isn’t incredibly fun, if you own it post their earnings announcement(though and it implodes – drops significantly: to some, it is still fascinating to watch.
When one trades options round earnings the % gains or losses get exacerbated to an even higher degree due to the power and leverage of options.
There are many concerns to research and pay attention when trading options during a stocks earnings reporting, but there is one I consider ESPECIALLY important to know about.
Concerns to Think about with Trading Options at Earnings
Directional Uncertainty
You may see a report beating their expected eps number but still drop. This could be due to poor guidance of future earnings / growth. It is not uncommon for Stocks to react counterintuitively to its earnings report
Time Frame of One’s Trade
Many options traders use short-term expiration, like a week or two out. This could work against them in the event he stock works out opposite their anticipated direction there may not be enough time to recover
Overpaying for Options
If the stock doesn’t move as much as expected, you could lose money. Even if your directional bet was correct. This could be because you overpaid for the option to begin with.
How /why would one overpay? It is possible to overpay because of the elevated Implied Volatility ( IV)
Which leads me to what I believe is…
The Biggest Concern Trading Options Around Earnings: Implied Volatility (IV)
IV is a considered a forward-looking metric. It reflects the market’s expectations of how much the price of an asset (like a stock) will fluctuate in the future
Definition: IV estimates the magnitude—not the direction—of future price movements of the underlying asset.
Further defined.. it is derived from the current market price of options using models like Black-Scholes.
How IV Works Is…
Higher IV means there is a greater expected price swings and higher option premiums (more expensive options)
Lower IV means there is smaller expected price swings premiums are Lower (cheaper options)
IV can Rush and Crush
What the heck does that mean?
What it is: IV spikes before a forward-looking event like an earnings report, or it experiences what is called an IV Rush… but as soon as the earnings is announced, watch out because the IV most often times drops big time or experiences what is called an IV Crush
Figure 1 will show both the IV Rush (before earnings) and the IV Crush (post earnings)
Why this matters: After earnings After re announced, IV often drops sharply—this is called IV crush.
Impact: Even if you’re right about the direction, your options can lose value if the move isn’t big enough to offset the drop in IV
Know this information ahead of time so you can better time your options trades.
Patterns & Profits
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I then break down for everyone where I see the security (stock, ETF or crypto) going in price and by when and if you want to learn from me a great place to start is my site Patterns and Profits.
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