@flowbee IV Crush is specific to earnings. There are several factors that go into an options price. Let’s say you have $95 calls expiring in a week for a $100 stock, that means you can buy the stock at $95. So technically this should cost $5, right? But instead it’ll cost like $7.50ish. Well a big part of that is Theta, or time decay. Let’s say every day is worth .20 cents. So with 5 trading days left – that’s $1. Ok that gets you to $6. The next biggest is usually Vega – or Volatility. The more volatile a stock is projected to be, the more you pay. Why again? Because if a stock is going to make big moves you could profit a lot (or lose a lot), and you’re paying for that chance. Right before earning IV is very high, which inflates an option pricing. So in this example let’s say a full $1.25 of that $7.50 is from IV right before earnings. But once earnings comes out, it’s not so volatile anymore, after all the big move already happened. So IV drops , a lot…now instead of contributing $1.25 to the pricing it only contribute .25.
October 5, 2022
Archives February 24, 2007