IV crush is the sharp fall in implied volatility once a scheduled event, most often an earnings report, has passed. Because the uncertainty the options were pricing has been resolved, option premiums can drop even when the stock moves, which is why options bought ahead of earnings often lose value despite a correct view on direction.
How it works
Before a known event, option sellers price an extra one-off jump into every expiry that spans it. That jump lifts implied volatility, and it lifts the nearest post-event expiry the most because the jump is spread over only a few days. On the term structure it shows up as a bump at that expiry.
Once the news is out, the jump is no longer possible, so implied volatility falls back toward its normal level, often by half or more in the nearest weekly expiry. Every option loses value through vega, and at-the-money options in the front expiry lose the most. Longer-dated options are less affected because the event is a smaller share of their total expected variance.
The size of the move priced in can be read from the market: the price of the at-the-money straddle (call plus put) for the first expiry after the report, divided by the share price, approximates the expected move. A straddle buyer needs the stock to move more than that to come out ahead; a seller profits if the move is smaller but carries the gap risk.
How to read it
- Priced-in move vs past reactions. If the straddle prices an 8% move and the stock has averaged 5% on recent reports, options are rich into the event. If it prices 4% against a 7% history, they look cheap.
- Timing. For a report after the close, the crush happens at the next open. For a report before the open, it happens at that day's open.
- IV against realized volatility. A high IV-to-realized ratio ahead of earnings is expected and is not, by itself, a sign of mispricing. See historical vs implied volatility.
Worked example
Illustrative numbers only, not a recommendation. A stock trades at $100 and reports after the close. The weekly at-the-money straddle costs $8 (a $4 call and a $4 put), so the market prices a move of about ±8%, with IV near 90%. Over its last eight reports the stock moved 5% on average.
- The next morning the stock opens at $105, up 5%. The expiry's IV falls to about 35%.
- The $100 call is now worth about $5.20 and the $100 put about $0.20, so the straddle is worth about $5.40.
- The straddle buyer loses about $2.60 per share, or $260 per straddle, roughly a third of the cost, despite a 5% move.
- To break even at expiry, the stock would have needed to finish beyond $108 or below $92.
A buyer of the call alone would have been right on direction and still made only about $1.20 per share on a $4 option, because most of the call's price was event premium that vanished.
Limitations and common mistakes
- The crush is not guaranteed. A very large move, a guidance shock or news that creates new uncertainty, such as a deal or an investigation, can keep IV elevated.
- The straddle is an approximation. It includes some ordinary time value; some traders use about 85% of the straddle as the estimate.
- Past reactions are a small sample. Eight reports cover two years, and a company's business can change in that time.
- Selling into earnings is not free money. A gap well beyond the priced-in move can cost several times the premium collected.
- Payoff tools that hold IV constant overstate post-event value for long options and understate it for short options.
In Clear Tape
For Pro members, the Earnings panel on the Options page shows the next report date and session, the move priced in (the at-the-money straddle of the first expiry after the report) and the average move over up to the last eight reports, with a chart of each past reaction against the priced-in line. With at least four past reports it reads rich when the priced-in move is 1.2 times the average or more, cheap at 0.8 times or less, and fair otherwise. The term structure chart marks the event expiry, and the strategy checks warn when earnings fall before a trade's expiry. Note that the strategy payoff lines for Today and In N days assume IV stays at today's level, so they do not show the post-earnings drop. Member data reflects the previous session's close. See pricing.
For educational purposes only. Not investment advice.