IV Crush
Market MechanicsThe sudden collapse in implied volatility after a major event like earnings — destroying the value of options even when the underlying stock moves in the right direction.
Implied volatility crush refers to the sharp decline in implied volatility (IV) that typically occurs immediately following a binary event — most commonly an earnings announcement, FDA decision, or major macro data release. Pre-event, options market makers inflate IV to reflect the uncertainty premium around the outcome. Post-event, regardless of the actual move, the uncertainty resolves and IV mean-reverts sharply downward. Because option premiums are directly proportional to IV (captured by the vega Greek), this IV collapse mechanically destroys extrinsic value even when the underlying moves favourably. A stock can beat earnings and rise 5% while long call holders lose money because the implied move priced into options was 8% and the IV collapse exceeds the directional gain.
In the days or weeks before earnings, options market makers raise implied volatility across all strikes and expiries to reflect the unknown outcome. This inflates all option premiums — calls and puts alike. The options market is essentially pricing in an expected move (e.g. 'the market expects an 8% move on earnings').
Earnings are reported (or the FDA decision drops, or the Fed speaks). The binary uncertainty resolves. The actual move is now known — it might be +5%, -3%, or flat. Regardless of the direction, the event is over.
The moment the uncertainty resolves, market makers slash implied volatility back toward normal levels. IV might drop from 80% to 30% overnight. This is the crush. Every option loses vega-weighted value proportional to the IV decline — typically 30–60% of extrinsic value evaporates.
If the stock rises 5% on earnings but the options market priced in an 8% expected move, your calls lose money. The directional gain (delta) is more than offset by the IV collapse (vega). This is mathematically possible and extremely common — it's why pre-earnings options buying is a negative expected value trade for most retail participants.
Meta reports earnings after market close. Implied volatility on weekly calls is at 65%. The stock is at $500. You buy the $520 calls for $8 ($800 per contract). Meta beats estimates and jumps 4% to $520 — right at your strike. Your option should be worth something, right? But IV collapses from 65% to 28% overnight. Your $520 calls open the next morning worth $3.50 — you lost 56% despite being directionally correct. The IV crush destroyed more value than the delta gain created.
IV crush is the primary reason buying options immediately before earnings is considered a losing strategy for most retail traders. The edge belongs to sellers of those inflated premiums, not buyers. If you want earnings exposure, consider buying options 2–3 weeks before the event when IV is lower, allowing the IV inflation itself to add value to your position before the event — then sell before earnings, not through them. Alternatively, look for stocks where the actual move consistently exceeds the options-implied move (positive earnings surprise history).