Long premium
Long options and IV crush risk
Long calls and long puts need more than correct direction. They need enough movement, soon enough, to overcome premium paid, IV contraction, time decay, and transaction costs.
Example
A trader buys a call for $4.20 with delta 0.45 and vega 0.08. The stock rises $3 after earnings, contributing roughly +$1.35 from delta. If IV falls 27 points, vega contributes roughly -$2.16. The simplified net change is -$0.81 before gamma, theta, and spread effects.
Questions before buying premium
- What move does the option chain already imply?
- How much IV can disappear after the catalyst?
- Will the expiration leave enough time after the event?
- Is the bid/ask spread narrow enough to exit cleanly?
Primary reading: OIC implied volatility overview · OIC Vega guide · OIC volatility and Greeks · FINRA options basics and Greeks · SEC Investor Bulletin on options