Many traders buy calls before the earnings, hoping the stock will go up after the earnings and they will make a bundle .. That is true if the stock really takes off .. But if there is a moderate move in the stock , you could still see a loss in your account and wonder why .. because you expected a profit .
This is because of the IV (Implied Volatility) crush after earnings.. Let us see how each Greek contributes to your total loss or gain in terms of real dollars...
Before I illustrate, please keep this in mind - IV rises steadily before the earning and crashes after the earnings .. dropping the price of the options ...
Let us say , before the earning, the stock is at 100 and you buy a call with Strike 105 .
IV = 75% , DTE= 5, Delta = 0.3 and Vega = 0.6 and you paid a premium of $2.20
After earnings:
The stock is at $104 .. so you think can sell the call for $4.0 ...and hence net a profit of $180 .
Here is the problem ..
After earning,
IV = 30% , Delta = 0
Loss from Vega = (Final IV - Starting IV) * Starting Vega
= (30 - 75) * 0.06
= - $2.7
Gain from Delta = (Final Stock Price after earning - Starting Stock Price) * Change in Delta
= ($104 - $100) * 0.3
= $1.2
Remaining Value of the call =
$2.20 entry − $2.70 vega loss + $1.20 delta gain = $0.70 remaining value
So you can sell it back only for 0.7 , thereby losing $150 even when the stock is at 104 .. you were directionally correct , but the stock did not move enough ..
Hope this helps