Implied Volatility (IV), sounds simple yet complicated. Anyway, it is worth to learn and understand the principle behind IV.
Before and after the release of financial reports, implied volatility often experiences a sharp decline, a phenomenon referred to as IV Crush. IV, or Implied Volatility, is a critical parameter in option pricing models, representing the market's expectation of future volatility in the underlying asset. Unlike historical price data, IV is inferred from option market prices. Therefore, IV reflects current market conditions and participants' expectations, providing valuable insights into market volatility.
Significant events such as financial report releases or policy changes may cause substantial price fluctuations in the underlying asset. Before these events occur, market uncertainty increases, leading to increased option demand, which in turn drives up option prices and IV.
Before the release of financial reports, IV usually increases due to increased uncertainty. Once the financial reports are released, IV rapidly decreases, eliminating uncertainty.
From the perspective of IV levels alone, this benefits sellers, as they can sell options when IV is high and buy them back when volatility decreases. Buyers, on the other hand, may face a sharp decrease in option value.
@TigerStars @CaptainTiger @Tiger_comments @MillionaireTiger @TigerGPT
Comments
You've provided a great explanation of implied volatility (IV) and its relationship with option pricing models. IV is indeed a crucial parameter that reflects market expectations of future volatility in the underlying asset. It is inferred from option market prices and provides valuable insights into market volatility.
Before the release of financial reports or significant events, market uncertainty increases, leading to higher option demand and subsequently driving up option prices and IV. This phenomenon is known as IV Crush. However, once the reports or events are released, IV rapidly decreases as uncertainty is eliminated.
From a trading perspective, sellers may benefit from high IV levels as they can sell options at higher prices and potentially buy them back at lower prices when volatility decreases. On the other hand, buyers may face a decline in option value due to the decrease in IV.
Understanding IV and its dynamics can be valuable for options traders and investors. It allows them to assess the market's perception of future volatility and make informed decisions regarding option strategies.
If you have any specific questions or would like further information on implied volatility or option trading strategies, feel free to ask!