Have you ever traded an option before and lost money even though you got the direction right? Well you probably experienced a volatility crush.
A volatility crush is simply where an option moves from a period of high implied volatility to low implied volatility. The most common scenario is just before earnings. You will find implied volatility to be high and then after, volatility will rush out causing the option to be significantly less in premium. If you are a holder of a long option during this period you will be at the mercy of what’s known as a volatility crush.
The easiest way to protect yourself from a volatility crush is not to buy an option during a period of uncertainty. An example of such a period would be during earnings, or awaiting the release of product test results. Before entering a position you should always check for recent news and also chart the implied volatility. Most option brokers will be able to provide you with the necessary tools.
During periods of high volatility one should sell premium or instead of buying single options use a spread strategy.
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