A single at-the-money $420 call on TSLA going into an earnings report. The clock counts down to the announcement. Before earnings, implied volatility runs hot and inflates the call. At the announcement the stock gaps up, but implied volatility crushes back to normal. Watch the call value: the stock moved your way, yet the option can still lose money. Press Play.
ATM $420 call value and implied volatility over time
Call value ($/share) Implied volatility (%) Earnings moment
Speed
Pre-earnings
Days to earnings
30
Stock price
$420
Implied volatility
90%
ATM $420 call value
$0.00
Plain EnglishBuying options right before earnings means overpaying for high implied volatility. Once the news is out, that volatility gets crushed, and the option can lose money even when the stock moves your way.
Three things to know about IV crush:
The premium already prices in the move. Before earnings, implied volatility is generally elevated because the market expects a jump, so you pay up front for a move that has to be bigger than average just to break even.
The crush hits the moment news is out. In practice implied volatility drops sharply right after the report, and that drop can subtract more value than a modest favorable move adds back.
Direction alone is not enough. As a rough guide, not a promise, an earnings option needs the stock to move far enough to beat both the crush and time decay, which is why a correct call can still lose.
Taxes are not shown here. Options and the underlying stock are taxed differently, and it depends on your holding period and account type. None of this is tax advice.