.png)
You think a company is going to report good numbers. You buy call options, which pay off if the share price rises. The results come out, the share price rises, and you open your account expecting to be up.
You are down.
This happens often enough to have a name. Traders call it volatility crush. Here is what is actually going on.
See today's Earnings Navigator
Every market morning we publish the companies reporting in the next two days that are actually worth a look, with the direction and the structure already worked out. Create a free account to read today's.
No card needed to start.
Uncertainty has a price
In the days before a company reports, nobody knows what the numbers will be. That unknown is worth something, and it gets built into the price of every option on that stock. More people want protection. More people want to place a bet. Prices go up.
The moment the results are published, the unknown is gone. It does not matter whether the news was good or bad. The uncertainty itself has been resolved, and the part of the option price that was paying for it disappears.
Options on that stock get cheaper, all at once, usually within minutes of the open.
Why that beats you even when you are right
You bought at the expensive price. The share price moved your way, which pushes the value of your option up. The uncertainty premium vanished, which pushes it down.
If the second effect is bigger than the first, you lose. Being right was not enough, because you needed to be right by more than you overpaid.
How to see it coming
There is a simple measure for this. IV Rank puts today's option prices on a scale against the last twelve months for that same stock.
A stock sitting at 90% is telling you plainly that buying its options right now means paying near the top of the year.
What to do instead
Match what you do to what options currently cost, rather than to how strongly you feel about the direction.
And the other risk
The first problem is this one. The second is simpler: the stock can move against you, and even the best looking setup sometimes does.
One approach covers both. A spread is a trade built from two options rather than one, and it caps your loss at a number you can see before you place it. So if the report goes badly, the damage is a figure you chose in advance, not one the market chooses for you.
In OptionsPlay, the Strategy Center shows you that maximum loss, and the Risk to Reward on the trade, before you commit to anything.
Where to get this daily
Every market morning the Earnings Navigator lists the companies reporting in the next two days that are worth a look, with the direction and the right structure already worked out.
Trade Earnings With a Plan
Your earnings calendar, research reports and trade ideas, organised in one dashboard that helps you trade with discipline.
Create a free account →Educational research. Not a recommendation to buy or sell any security.
Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options.