IV crush in plain words
IV crush is a rapid, sizable drop in implied volatility. It most commonly shows up right after a known risk event, such as a company's earnings report, once the uncertainty that was driving option prices up is resolved.
Implied volatility is a big part of an option's price, so when it collapses, option premiums can fall sharply even if the stock itself does not move much.
Why it happens
Before an earnings report, nobody knows how the stock will react, so option prices build in extra cushion for a possible big move. That extra cushion is reflected as elevated implied volatility.
Once the report is out and the market has priced in the news, most of that uncertainty is gone. Implied volatility drops back toward more normal levels, often within a day, taking option premiums down with it.
A simple example
Before earnings, a stock at $100 has a $100 call trading at $6.00, with implied volatility elevated to 60% because of the upcoming report. The next morning, the stock opens at $102, a modest move, but implied volatility drops to 30% now that the report is behind it.
Even though the stock rose, the call might now be worth only $3.50, because the collapse in implied volatility outweighs the small gain from the stock's move. That gap between what buyers hoped for and what they got is IV crush. These numbers are illustrative, not a real quote.
How traders plan around it
Buying options right before a known event, hoping for a big move, is one of the more common ways new options traders get caught by IV crush, because the move often is not big enough to offset the drop in implied volatility.
Some traders instead look to sell options before these events, since they are the ones who benefit when implied volatility collapses, though that comes with its own, larger risk if the move is bigger than expected. Comparing an option's implied volatility to the stock's own historical volatility is one way to see how much extra cushion is priced in before an event.
IV Crush FAQ
What is IV crush?
A sharp drop in implied volatility, typically right after a known risk event like earnings, that deflates option premiums.
Why do options lose value after earnings even if the stock moves the right way?
The drop in implied volatility (IV crush) can outweigh the gain from the stock's move, especially if the move is modest.
Who benefits from IV crush?
Option sellers generally benefit, since falling implied volatility lowers the value of the options they sold. Option buyers are usually hurt by it.
How can I tell if IV crush risk is high before an event?
Comparing the option's current implied volatility to the stock's typical historical volatility, or to its implied volatility before past similar events, can show how much extra cushion is priced in.
Related terms
Educational content only, not financial advice.