What IV crush is
Implied volatility crush is the sharp fall in an option's implied volatility immediately after a scheduled event — earnings, an FDA decision, a central bank meeting, a court ruling. It happens within minutes of the announcement, and it happens whether the news is good, bad or exactly as expected.
Because implied volatility is a direct input to the option's price, the fall takes value out of every option on that underlying at once. Long option holders pay it. Short option holders collect it.
The reason it catches people is that it is completely disconnected from whether they were right. A trader who correctly predicted a strong quarter, and correctly predicted the stock would rise, can still close the position at a loss — because the volatility they bought was worth less the moment the uncertainty ended.
Why it happens, reliably, every time
Implied volatility is not a measurement of the past. It is the market's price for uncertainty about the future, backed out of what people are currently willing to pay for options.
In the run-up to earnings there is a known, dated, binary-ish uncertainty sitting in front of the stock. Nobody knows the number, everyone knows when it arrives, and demand for options rises on both sides — hedgers protecting positions, speculators expressing views. Option sellers, facing a genuine unknown, demand more premium. Implied volatility rises, often substantially, over the two or three weeks into the date.
Then the announcement happens, and the uncertainty is simply gone. Whatever the number was, it is now known. The stock may move violently on the news, but the uncertainty it was carrying has been resolved, and the elevated premium that was compensating sellers for that uncertainty has nothing left to compensate them for. IV drops back toward its normal level, usually within the first minutes of trading.
You are not buying "the stock will go up". You are buying uncertainty, at a price. The event does not pay out on the direction of the news — it pays out on whether the move was larger than the uncertainty you paid for. When the event passes, the uncertainty is worthless regardless of who was right.
The scale is worth knowing. A liquid large-cap might run IV from 25% up to 55% into earnings and back to 28% the next morning. A smaller, more volatile name can go from 60% to 140% and back. The larger the run-up, the larger the crush, and the more the stock has to move for a long option to survive it.
Reading the move already priced in
The options market publishes its own estimate of how far the stock will move on the event, and you can read it directly. The quickest approximation uses the at-the-money straddle — the call plus the put at the strike nearest the current price, in the expiry just after the event:
implied move ≈ (ATM call + ATM put) ÷ stock price
If a $180 stock has a $6.20 call and a $5.90 put at the 180 strike for the expiry three days after earnings, the straddle is $12.10, and the implied move is 12.10 ÷ 180 = 6.7%.
That single number is the most useful thing on the screen before an event trade, because it converts the question from a vague one into a sharp one. Not "will this stock go up?" but "will this stock move more than 6.7%?" — and the second question is one you can have an informed opinion about, by looking at what the stock actually did on its last eight earnings dates.
If the implied move is 6.7% and the stock has moved an average of 4% on its last eight reports, the options are expensive relative to the history. If the implied move is 5% and the stock routinely does 9%, they are cheap. That comparison is the entire pre-trade analysis, and it takes two minutes.
Worked example: the bar you have to clear
A long call through earnings
Stock at $180, earnings tomorrow. IV on the near expiry is 62%; its typical non-event level is about 30%. You buy the 185 call, 10 days out, for $5.10. Vega is 0.14, delta 0.42.
The crush is the part you can forecast. IV falling 62% → 32% is 30 points:
vega loss = 30 × 0.14 = −$4.20
Before the stock has moved a cent, $4.20 of your $5.10 — 82% of the premium — is scheduled to disappear. For the trade to break even, delta has to produce $4.20, and at a delta of roughly 0.42 rising toward 0.55 as the stock climbs through the strike, that needs something like a $9 move, or 5%, in the right direction. Immediately.
Now check the straddle: it is pricing an implied move of 5.5%. So the market has already told you this. The option is not a bet that the company does well — it is a bet that the stock moves more than 5.5%, in your chosen direction, and being right about the earnings while the stock moves 3% is a losing trade.
The stock rises 3% on a good report. You were right. Delta gives you about +$2.40, the crush takes $4.20, theta takes a little more. The option is worth roughly $3.20 and you are down 37% on a correct call.
Selling into it is not free money either
The obvious conclusion is to be on the other side: sell the inflated premium, collect the crush. This works more often than not, and it is how a great many event-driven traders lose a great deal of money.
Selling options into earnings is a positive-expectancy-looking trade with a badly skewed distribution. You win small, frequently — the crush is reliable and the stock usually stays inside the implied move. Roughly two times in three, it is a clean winner. Then the company misses badly, the stock gaps 22% against a short position with high gamma, and one loss erases a year of collected premium.
The implied move is not an arbitrary number. It is roughly the one-standard-deviation move, which means the market expects the stock to finish outside it about a third of the time. Sellers are being paid for a real risk, at a price that is often fair. Defined-risk structures — spreads and iron condors — cap the tail, at the cost of most of the premium. That trade-off is the actual decision, and there is no version of it where the premium is free.
Undefined-risk short options through an event have a maximum loss that is not knowable in advance, which means standard position sizing cannot size them — the formula needs a worst case, and there isn't one. If you cannot state the worst case, you cannot size the trade.
What to do instead
- Read the implied move first, always. Straddle price divided by stock price, before anything else. If you are not willing to bet the stock beats that number, do not buy the option, however confident you are about the company.
- Compare it to the last eight reports. Actual post-earnings moves are easy to look up and are the only relevant benchmark. Expensive and cheap are relative to that history, not to the dollar price of the contract.
- Consider expressing the view in the stock. If your thesis is "good quarter, stock goes up", shares have no vega and no expiry. You give up leverage and you remove the two things that most often turn a correct thesis into a losing trade.
- Or buy time past the event. A longer-dated option has lower vega relative to its premium and crushes less violently, because a smaller share of its value comes from this one date.
- Price the crush before you enter. Take the option's current IV, subtract its typical level, multiply by vega. That is your scheduled loss. Ask whether the move you expect clears it. Most of the time the answer is no, and finding that out costs nothing.
The underlying mechanics — what vega and theta are doing to the position between now and expiry — are covered in where an option actually breaks even.