📉 Options & Cboe · Lesson 5 of 7 · 10 min
Delta & Implied Volatility — The Two Numbers That Matter
📊 Two people buy calls on the same stock. One buys the day before earnings, the other the morning after. The stock goes up — and the first one loses money anyway. That's not a typo — it's implied volatility, the number that decides how much fear was already baked into the price you paid. Skip it, and you can be right about the stock and still wrong about the trade.
💡 Key idea
Delta = option's speed. IV = option's price level. Buy low IV, sell high IV when possible.
🧠 Why it matters
DELTA: how much the option price moves per $1 move in the stock. 0.5 delta = option gains $0.50 per $1 stock rise. IMPLIED VOLATILITY (IV): market's expectation of future movement as annualized %. High IV = expensive options. Low IV = cheap options. IV crushes after earnings.
🌍 In the real world
📉 Before Tesla earnings, options might have IV of 90%. After earnings resolve, IV collapses to 40%. Even if the stock moved in their direction, option buyers can still lose if the move was smaller than the 90% IV had already priced in. This is why experienced traders sometimes SELL options before earnings — almost always as defined-risk spreads, since a naked short option into earnings can lose far more than it collects.
📌 Takeaways
- Delta: 0-1 for calls, 0 to -1 for puts
- IV 40% = market expects a one-standard-deviation move of about ±40% over a year
- IV crush after earnings destroys option buyer value
✅ Test yourself
A call option has delta 0.4. If the stock rises $2, the option moves approximately:
- $2
- $0.80
- $0.40
- $4
Answer: B · $0.80
Delta × stock move = option price move. 0.4 × $2 = $0.80 per share = $80 per contract (100 shares). Delta measures your effective exposure.
High implied volatility means options are:
- Cheap — buy now
- Expensive — the market expects large moves
- Guaranteed to profit
- Not worth trading
Answer: B · Expensive — the market expects large moves
IV IS the price of uncertainty. High IV = expensive options. Buying calls into earnings often fails because the high IV is already priced in — you need a BIGGER move than expected.
What is 'IV crush'?
- When volatility causes stock crashes
- When IV drops sharply after an expected event resolves, killing option value
- When options expire in-the-money
- A specific ticker name
Answer: B · When IV drops sharply after an expected event resolves, killing option value
After earnings or major events, uncertainty disappears and IV collapses. Option buyers who bought before earnings often lose even if they were right about the direction.
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