IV Crush Explained: What It Is and How It Impacts Options Trading For options traders, success isn’t just about predicting the direction of a stock— it’s also about understanding volatility. One of the most important (and sometimes overlooked) volatility-related phenomena is IV crush. Short for Implied Volatility Crush, IV crush can significantly impact the value of an options contract—often immediately after major market events like earnings reports. In this blog, we’ll break down exactly what IV crush is, why it happens, how it affects options prices, and how traders can navigate or even profit from it. What Is IV Crush? IV crush refers to the sudden and sharp drop in implied volatility (IV) of an options contract, usually after a highly anticipated event, such as: • • • • •
Earnings announcements Product launches FDA decisions Federal Reserve meetings Economic reports
Before such events, implied volatility increases because there's uncertainty in the market and traders expect a potential price swing. This increase in IV raises the premium (price) of both call and put options, regardless of whether the stock moves or not. Once the event passes and the uncertainty is resolved, implied volatility drops sharply, often regardless of how much the underlying stock moves. This is what we call an IV crush—and it can wipe out a substantial portion of an option’s value. How IV Crush Works: A Quick Example
Imagine you buy a call option on a stock trading at £100, and it’s expected to report earnings after the market closes. Because of the uncertainty, implied volatility is high, and the option premium costs £5. Let’s say the next morning the stock opens at £103—a modest increase. However, with earnings behind and no surprises, IV drops significantly. As a result, your option may now be worth only £2.50, even though the stock went up. Why? Because the decrease in implied volatility had a greater negative effect on the premium than the stock’s actual movement had a positive one. This is IV crush in action. The Greeks Behind It: Vega’s Role IV crush is closely related to the Greek letter Vega, which measures how much the price of an option changes with a 1% change in implied volatility. Options with higher Vega (typically longer-dated or at-the-money contracts) are more susceptible to IV crush. When IV drops after an event, Vega causes the option premium to decline—even if other factors (like Delta or the stock's price movement) suggest it should increase. When Does IV Crush Happen? IV crush typically occurs after: • Earnings announcements: The most common trigger. Stocks like Apple, Tesla, or Amazon often see elevated IV pre-earnings. • FDA decisions on biotech stocks • Mergers/acquisitions announcements • Legal verdicts or rulings impacting specific sectors or companies • Economic reports like CPI, jobs data, or central bank interest rate decisions In all of these, options premiums are inflated leading up to the event and deflate afterward, often regardless of the actual result.
How Traders Can Manage or Profit from IV Crush • Avoid Buying Options Just Before Major Events If you buy options right before earnings, you're paying a premium inflated by IV. Unless the stock makes a larger-than-expected move, the IV crush may leave you with a loss—even if you're right about direction. • Sell Options Instead Selling options (calls or puts) before high IV events is a common strategy. You’re essentially selling inflated premiums and collecting the theta (time decay) and benefit from falling volatility. Popular strategies: o Iron Condor o Straddle or Strangle Sell o Covered Calls These strategies allow you to benefit when IV drops, assuming the stock doesn’t move drastically outside your range. • Use Longer-Dated Contracts Longer-term options (LEAPS) tend to be less affected by IV crush than short-term weekly options. Final Thoughts IV crush is one of the most important concepts in options trading, especially around earnings or other market-moving events. Understanding how implied volatility impacts option premiums—and knowing when it’s likely to drop—can help traders avoid losses or create profitable strategies. Whether you’re new to options or a seasoned trader, mastering IV crush is essential for smart, volatility-aware trading.
