So, IV goes up be4 big news/rumors in a stock. Then, right after said news/rumors, it shoots down. How do you make money in short term plays like this with options? Seems like if you buy before the move, you will pay inflated prices, and if you sell after, you will sell at the price with the IV gone for much less.
for volatility collapse I use calendar spreads, sell the front month, hedging with the back month, same strike
I would do the opposite of what is in the quote. If neutral about direction, I would sell the next month and buy the front month, with way OTM strikes. The effect of time to expiration is similar to bonds behaviour. If I bet (sure?) on a direction, I will buy an OTM butterfly, with short strike where I think the stock will go.
Consider a short straddle with less than a week to expiration. You want to sell high volatility. You can always get out of the losing short option quickly once direction is established. And, if it reverses, you can always cover the remaining option. Suppose GOOG is making an announcement the final week before expiration Friday. You know it is important, but you ahve no idea which way it will go. So, traders are "guessing" the direction and loading up on their "guess." Plus volatility is up. So, you sell the near-month ATM call and put. The announcement is made and GOOG begins to sink. Sell the losing put. If the stock reverses during the week, can always cover it.