IV crush is the rapid decline in implied volatility that occurs after an anticipated event, such as earnings, is resolved. Before events, options are expensive because uncertainty is high (elevated IV). After the event, regardless of which direction the stock moves, IV drops sharply as uncertainty evaporates. This causes option prices to fall, often hurting buyers who correctly predicted direction.
- Sharp IV drop after events resolve
- Options lose value even if stock moves correctly
- IV can drop 30-50% or more overnight
How IV Crush Works
IV crush shows volatility before and after events:
IV Crush Example (Earnings):
Before Earnings:
Stock: $100
ATM Call IV: 80%
Call Premium: $8.00
After Earnings (Stock moves to $105):
Stock: $105
ATM Call IV: 35% (IV crushed!)
Call Premium: $6.00
Expected: $8.00 + $5 intrinsic = $13?
Actual: $6.00 due to IV crush
You were RIGHT but still LOST money!
Lost $2.00 per contract despite correct direction.
Quick Reference: IV Crush Impact
| IV Change | Premium Impact | Example |
|---|---|---|
| 80% → 40% | Large drop | Lose 40% or more |
| 60% → 30% | Significant drop | Lose 25-35% |
| 40% → 25% | Moderate drop | Lose 15-20% |
Example: Earnings IV Crush
Buying Call Before Earnings:
| Timing | Stock | IV | Premium | Your P/L |
|---|---|---|---|---|
| Pre-Earnings | $100 | 75% | $6.00 | Entry |
| Post-Earnings | $105 (+5%) | 30% | $5.50 | -$0.50 loss |
Stock went up 5% but you lost money due to IV crush.
IV crush is the sudden drop in implied volatility after an event like earnings. Options lose value rapidly even if you predicted the right direction. To profit, you need the stock to move MORE than the expected move already priced into options.
Expected Move Calculation
Before buying options, calculate the expected move:
Expected Move Formula:
Expected Move = Straddle Price / Stock Price
Example:
Stock: $100
ATM Straddle: $8.00
Expected Move = $8 / $100 = 8%
Stock needs to move MORE than 8%
for option buyers to profit!
Strategies Around IV Crush
Avoiding IV Crush (Buyers)
- Buy options after events when IV is low
- Only buy if expecting move larger than expected move
- Use spreads to offset vega
Profiting from IV Crush (Sellers)
- Sell strangles/straddles before earnings
- Iron condors benefit from IV collapse
- Short vega positions
When IV Crush Occurs
| Event | IV Crush Typical |
|---|---|
| Earnings | 30-50% drop |
| FDA Decision | 40-60% drop |
| Elections | 20-40% drop |
| Economic Data | 10-20% drop |
Common Mistakes
-
Buying calls/puts before earnings – IV crush negates correct direction.
-
Not calculating expected move – Need to beat what’s priced in.
-
Ignoring IV rank – Check if IV is elevated before trading.
-
Using market orders at open – IV crush + wide spreads = bad fills.
How JournalPlus Tracks IV
JournalPlus logs IV at entry and exit, highlighting trades affected by IV crush and helping you avoid repeating expensive mistakes.
