HV-IV Divergence
An HV-IV divergence occurs when HV declines and IV rises or vice versa.
The classic example is often observed before a company’s quarterly
earnings announcement, especially when there is lack of consensus among
analysts’ estimates. This scenario often causes HV to remain constant or
decline while IV rises. The reason? When there is a great deal of
uncertainty as to what the quarterly earnings will be, investors are reluctant
to buy or sell the stock until the number is released. When this happens, the
stock price movement (volatility) consolidates, causing the calculated HV
to decline. IV, however, can rise as traders scramble to buy up options—
bidding up their prices. When the news is out, the feared (or hoped for)
move in the stock takes place (or doesn’t), and HV and IV tend to converge
again.