What is IV crush?
In one line: IV crush is a sharp drop in implied volatility, and so in option prices, right after an expected event like an earnings report has passed.
A simple example
Before a big event, nobody knows how the stock will react. So option prices climb. They're priced for a big move. That "expected move" is Implied volatility.
Once the news is out, the mystery is gone. IV falls fast. Option prices fall with it. That's IV crush.
Here's an illustration with made-up numbers. A stock trades at $100 the day before earnings. A $100 call costs $6.00 because IV is very high.
Earnings come out. The stock rises to $103. Good news for the call, right? But IV collapses overnight. The call is now worth about $4.00.
The stock went your way and the option still lost a third of its value. The move was smaller than the price had already baked in.
Why it matters
When you buy an option before an event, you're paying for the expected move. You need the real move to be bigger than that just to come out ahead.
Sellers of options face the other side. They collect a premium that's larger before the event, but a surprise move can be far bigger than expected. Losses on sold options can be large.
Vega tells you how much an option's price changes for each 1-point drop in IV, so it shows how exposed you are.
A common mistake
Buying options right before earnings because you "know" the direction. Even if you're right about direction, IV crush can eat the gain. Check how high IV is first, for example with IV rank.
Earnings dates are on the calendar. Look at the Earnings report date before you open any options trade on a stock.
Questions
When does IV crush happen?
Most often right after earnings, but also after other known events: drug trial results, court rulings or big economic reports.
Can you avoid IV crush?
You can avoid holding bought options through the event. Some traders use spreads, where one option's crush partly offsets the other's.
How much do options drop from IV crush?
It depends on how high IV was and how far it falls. It can be a large share of the option's price, as in the example above.
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