This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.

Volatility Crush: A Misunderstood Term

Volatility crush is among the more common but poorly understood terms used by new options investors. They mostly place irrational bets on options ahead of earnings because they do not fully understand what they are doing.

These investors will take a look at a high-priced stock that is set to report earnings in the near-term and buy large amounts of out-of-the money call or put options with a short duration until expiration. 

These options trade at a low price because the stock has a long way to go in a short period of time to hit the strike price. So if the stock skyrockets in reaction to a smashing earnings report, the deep out-of-the money call options should come into play, and investors might assume that they are sitting on a gain of 200% or more.

Implied Volatility

For options that are trading far out of the money, a large portion of their value is derived from implied volatility. This is especially true of high tech and New Age companies that have given large growth outlooks but have offered little in terms of tangible results to satisfy investors.

In essence, if the degree of what is unknown heading into an earnings release is high, an option’s implied volatility is high. For example, will a cloud company deliver on management’s 40% revenue growth guidance? Will a new artificial intelligence cybersecurity company become profitable a year earlier than originally expected?

Before the earnings report is released, the level of uncertainty is high. But after the earnings release and follow-up conference call, much that was unknown is now known. Management will either live up to high expectations or they will not.

What happens next is often a dramatic drop in implied volatility. This is an anticipated outcome because some, most, or all of the prior uncertainty surrounding the company’s direction is now gone and priced out of the option.


Assume that company XYZ is scheduled to report results in 15 days and an investor believes the results will exceed expectations by a wide margin. If shares in XYZ are trading at $270, an investor could bet on the $300 call options that expire three days after the earnings report, for $3.00 per option.

The stock price must rise at least $30 in the next 18 days for the option to have any chance of expiring in the money.

The implied volatility for this and all option contracts can be found on a brokerage platform. Assume in our example that it is 59%.

We can calculate the expected move of the stock by multiplying the stock price times the implied volatility times the square root of the number of calendar days divided by 365.

In our case, this translates to: $270*59%*.22 = $35.04. This means that the stock could rise to $305.04 or fall to $234.96.

At $305.04, the option would be in the money, but investors should not celebrate quite yet. Many investors who thought they had hit a jackpot could wake up the next morning to see their option barely making any money, or even losing money.

This is because of implied volatility. As previously noted, implied volatility tends to fall after an earnings release. So some of the variables that make up an option price may cause the option to increase in value, while a large drop in implied volatility could more than offset those gains.

In other words, fluctuations in implied volatility “crushed” your option position.

Originally Posted on June 23, 2021 – Volatility Crush: A Misunderstood Term

Dollars expressed are in CAD


The strategies presented in this blog are for information and training purposes only, and should not be interpreted as recommendations to buy or sell any security. As always, you should ensure that you are comfortable with the proposed scenarios and ready to assume all the risks before implementing an option strategy.

Copyright © 2021 Bourse de Montreal Inc. All rights reserved. Do not copy, distribute, sell or modify this document without Bourse de Montreal Inc.’s prior written consent.  This information is provided for information purposes only. Neither TMX Group Limited nor any of its affiliated companies guarantees the completeness of the information contained in this publication, and we are not responsible for any errors or omissions in or your use of, or reliance on, the information.  This publication is not intended to provide legal, accounting, tax, investment, financial or other advice and should not be relied upon for such advice.  The information provided is not an invitation to purchase securities listed on Toronto Stock Exchange,TSX Venture Exchange and/or Montreal Exchange.  TMX Group and its affiliated companies do not endorse or recommend any securities referenced in this publication.  TMX, the TMX design, The Future is Yours to See., Toronto Stock Exchange, TSX, TSX Venture Exchange, TSXV, and Voir le futur. Réaliser l’avenir. are the trademarks of TSX Inc.  Montreal Exchange, MX are the trademarks of Bourse de Montréal Inc. and are used under license. All other trademarks used herein are the property of their respective owners.

Disclosure: Montréal Exchange - Option Matters

This material is from Bourse de Montréal Inc. and is being posted with its permission. Opinions expressed in this document do not necessarily represent the views of Bourse de Montréal Inc.

This document is made available for general information purposes only. The information provided in this document, including financial and economic data, quotes and any analysis or interpretation thereof, is provided solely for information purposes and shall not be construed in any jurisdiction as providing any advice or recommendation with respect to the purchase or sale of any derivative instrument, underlying security or any other financial instrument or as providing legal, accounting, tax, financial or investment advice. Bourse de Montréal Inc. recommends that you consult your own advisors in accordance with your needs before making decision to take into account your particular investment objectives, financial situation and individual needs.

Although care has been taken in the preparation of this document, Bourse de Montréal Inc. and/or its affiliates do not guarantee the accuracy or completeness of the information contained in this document and reserve the right to amend or review, at any time and without prior notice, the content of this document.

Neither Bourse de Montréal Inc. nor any of its affiliates, directors, officers, employees or agents shall be liable for any damages, losses or costs incurred as a result of any errors or omissions in this document or of the use of or reliance upon any information appearing in this document.

Disclosure: Canadian Options Trading

Canadian Listed Options involve risk and are not suitable for all investors. Trading of certain standardized Canadian Listed Options may not be permitted for U.S. Residents. For more information read the Characteristics and Risks of Listed Canadian Standardized Options, also known as the options disclosure document (ODD). To receive a copy of the ODD call 877-745-4222 or copy and paste this link into your browser:

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Montréal Exchange - Option Matters and is being posted with permission from Montréal Exchange - Option Matters. The views expressed in this material are solely those of the author and/or Montréal Exchange - Option Matters and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.

Disclosure: Forex

There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.

Disclosure: Options Trading

Options involve risk and are not suitable for all investors. For more information read the Characteristics and Risks of Standardized Options, also known as the options disclosure document (ODD). To receive a copy of the ODD call 312-542-6901 or copy and paste this link into your browser:

trading top