What is IV crush and why do options lose value after earnings?
IV crush is the rapid fall in implied volatility that follows a scheduled event, such as an earnings report, once the uncertainty has been resolved. Because option prices depend heavily on implied volatility, the drop can cut an option's value sharply even when the stock moves in the direction the buyer wanted. It is the main reason buying options right before earnings is harder than it looks.
Why implied volatility rises before an event
An earnings report is a known date on which the stock is likely to move more than on a normal day. Options that expire after that date have to price in the jump. Sellers demand more premium to carry that risk, buyers are willing to pay it, and the implied volatility of those options rises in the days or weeks before the report.
The effect is concentrated in the nearest expiry that includes the event. A weekly option expiring two days after earnings has most of its remaining value tied to the event, so its implied volatility can be several times the stock's normal level. Options expiring months later carry the same event, but it is diluted across many ordinary days, so their implied volatility rises much less.
You can see this directly on the term structure. In the days before a report, the expiry that spans the event often trades at a much higher implied volatility than both the expiry before it and the one after it, creating a visible bump on the curve. The size of that bump, relative to the neighbouring expiries, is a rough measure of how much the market is charging for the event itself rather than for ordinary days.
What happens when the event passes
Once the report is out, the specific uncertainty is gone. The stock has jumped, or not, and the remaining days to expiry look like ordinary days again. Implied volatility on the near-term options falls back toward normal levels, often at the open of the first session after the report.
The drop applies to calls and puts alike, whichever way the stock moved. That is the crush: the volatility premium that was paid for the event is removed all at once, and the option's price falls to reflect only its intrinsic value plus the time value appropriate for an ordinary stock.
The size of the crush depends on how much of the option's value was event premium. Short-dated, at-the-money options are hit hardest. Deep in-the-money options, whose value is mostly intrinsic, and long-dated options, whose implied volatility rose only modestly, are less affected.
A worked example
Imagine a stock at 100 with earnings after the close on Monday and a weekly expiry on Friday. Its normal implied volatility is around 30 percent, but the Friday options are trading at about 90 percent. The 100-strike straddle, one call plus one put, costs roughly 8 dollars, which means the market is pricing a move of about that size by Friday.
The stock reports and opens Tuesday at 105, up 5 percent. The call buyer was right about direction. But implied volatility on the Friday options has dropped back near 30 percent. The 100 call is now worth about 5 dollars of intrinsic value plus a small amount of time value, and the 100 put is worth very little. The straddle is worth perhaps 6 dollars, and the call on its own may be worth only modestly more than its pre-earnings price, if at all.
The stock moved, but it moved less than the options had priced. That gap, between the move priced in and the move delivered, is what decides whether buying options into an event pays.
What IV crush means for different trades
For buyers of options into earnings, the hurdle is not just being right about direction but being right by more than the market expected. A stock that moves exactly the implied amount usually leaves straddle buyers roughly flat before costs, and anything less is a loss.
For sellers, the crush is the source of profit, but the risk is a move far larger than priced. A seller collects the event premium in exchange for absorbing the occasional outsized gap, and one such gap can outweigh many quiet reports.
Spreads change the exposure. A calendar spread that sells the near-term option and buys a longer-dated one profits from the near-term crush while the longer leg holds more of its value. A vertical spread, which buys one strike and sells another in the same expiry, offsets much of the volatility exposure, so it depends more on direction than on the crush.
Common questions
How do you avoid IV crush?
You cannot avoid it if you hold a short-dated long option through the event. Traders reduce exposure with spreads, longer-dated options, or by closing positions before the report.
Does IV crush affect puts and calls equally?
Both lose their event premium. Which one ends up worth more depends on which way the stock moved.
When does IV crush happen?
Usually at the first opportunity to trade after the event, which for after-close earnings means the next morning's open.
IV crush is the event premium leaving the options once the event is over. Buying into earnings requires a move larger than the one priced in, not just the right direction.
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