What is implied volatility (and why did my option get crushed after earnings)?
Implied volatility (IV) is the market’s estimate of how much a stock will move, and you pay more for options when it is high. Before earnings, IV inflates because a big move is expected. The second the report drops, that uncertainty disappears, IV collapses, and your option can lose value even if the stock went your way. That is IV crush, and it is almost entirely predictable.
IV is baked into every option’s price. High IV means the market expects a big swing, so options are expensive. Low IV means calm is expected, so they are cheap. Two identical-looking calls can cost wildly different amounts purely because of IV.
Earnings are the classic trap. In the days before a report, IV climbs as everyone braces for a surprise, pumping up option prices. Buy then, and you are paying for the expected move.
Here is the deterministic part. Once earnings are out, the surprise is known and IV deflates fast, often instantly. This crush can wipe out more value than the stock’s actual move gives you. Traders who were right on direction still lose because they overpaid on volatility.
The lesson: check whether IV is unusually high before you buy, and respect that an event you are excited about is usually already priced in.