Fourth video in the series on learning options with AI. We already covered the Call, the Put and moneyness and theta. Today we get into what literally moves the professional options market: implied volatility. Here you’ll understand why some options are expensive, why everything changes before earnings, and why professionals often sell options instead of buying them.
What volatility is (and implied volatility)
Volatility measures how much an asset moves, regardless of direction. Just how much it moves. A stock that goes from 100 to 101, down to 99 and back to 100 has low volatility. Another that goes from 100 to 120, then to 80 and then to 140 has a lot.
Why IV affects the price of options so much
An option gains value if there’s a greater chance of ending up in the money. And the more an asset moves (or is expected to move), the more chances an option has of getting into the money. The example of Tesla at $100 with a strike-150 call:
- Very stable Tesla (moves 1% a month) — the probability of reaching 150 is small, the option is worth little
- Very volatile Tesla (20% in a week) — now there are real chances, the same option is worth much more
Conclusion: more volatility = more expensive options, both calls and puts.
Before earnings: IV spikes
Before the earnings of Nvidia, Tesla, Apple or anyone, options usually spike in price. Why? Because the market expects a big move —up or down— and implied volatility rises a lot. There’s a key date and everyone is waiting to see whether the results will be good or bad.
The IV Crash: the destroyer of beginners
Here’s what ruins so many rookies. Imagine you buy an Nvidia call right before earnings, paying a fortune because IV is sky-high. Nvidia reports, the stock rises (you nailed the direction!). But…
The reason connects with the break-even we already saw: your break-even point is the strike plus the premium you paid. If you paid a premium inflated by high IV, even if the stock reaches the strike, you still have a long way to go to beat the break-even. That’s why volatility is so decisive when buying or selling.
Buy or sell depending on IV (with nuances)
- Buying options usually makes more sense with low IV and expecting a strong move. Careful: if IV is low it’s for a reason — the market doesn’t expect that move. It can happen, but keep it in mind.
- Selling options usually makes more sense with high IV, if you think the real move will be smaller than expected. You collect more premium, yes, but you also take on more risk: the market expects higher volatility for a reason.
And as a reminder I always repeat: an option is not a bet. It’s an investment based on what you think the underlying will do, just like when you buy a stock because you think it’ll go up. You’re not gambling, you’re investing with judgment.
Seeing it in ProRealTime
In ProRealTime you can add the Implied Volatility indicator (Indicators → search “implied volatility”). On the S&P 500, that indicator is the famous VIX, the index’s volatility index. In the February 2026 drops, for example, you could see how volatility rose from ~14% to levels of 20-26% as the falls got worse.
Conclusion
Implied volatility is one of the pillars of options, and not taking it into account is one of the most expensive beginner mistakes. It’s not enough to look at the underlying: you also have to look at the expected volatility, because you might be paying a fortune (high IV) or collecting much more (selling with high IV, but with more risk). The case of the IV Crash after earnings sums it all up: you can nail the direction and still lose, if you bought with volatility through the roof. In the next video we’ll keep adding pieces. Don’t forget to comment and like to enter the book giveaway.
