Welcome to this walkthrough of the IV rush strategy for earnings.
This guide will summarise the key points you need to know about researching and implementing this strategy.
Be sure to take the quiz at the end to test your understanding and receive personalised feedback.
- Implied volatility (IV) rises in the weeks and days leading to an earnings announcement.
IV then sharply drops on the first trading day after the release (IV Crush).
This rise affects all expirations but is more pronounced for the closest expiration to earnings.
This IV increase is why implied moves are higher before earnings compared to regular days.
This IV rise reflects the high demand in anticipation of the earnings release.
The graph shows the increase in IV and price of the closest expiration straddle in the two days leading up to NFLX earnings last year.
IV increased gradually from 30% to 50%.
The rise in IV countered the effect of time decay (theta).
As a result, the straddle price increased by 5% in the two days leading up to the earnings release.
| IV Rush | IV Crush |
|---|---|
| - Occurs slowly over days leading to earnings. | - Occurs immediately on open on the first trading day after release. |
| - Traders aim to capitalise on the expected increase in IV leading up to the event. | - Traders bet on the actual stock being higher or not than the implied move. |
| - Lower risk approach by avoiding post-earnings IV crush and exiting before. | - Significantly impacts option premiums, leading to big losses if not anticipated. |