IV crush explained: why options can drop after good news
The stock moved the way you guessed. The option still fell. That's IV crush, and it's one of the most common surprises in options. Here's the math behind it.
What "IV crush" means
Implied volatility (IV) is the size of move that option prices are built for. Before a big known event, IV usually climbs. People pay up for options because a big move might be coming.
Once the news is out, the mystery is gone. IV often falls sharply, sometimes in minutes. That sudden drop is IV crush.
Because IV is part of every option's price, a crush lowers the price of calls and puts alike. If you're new to IV, read implied volatility explained first.
When it usually happens
- Company earnings reports. The classic case.
- Big economic releases, like CPI or an FOMC decision. Index options often see it. See CPI and FOMC days.
- One-off events: a court ruling, a drug trial result, a product launch with a set date.
The common thread: a date everyone knows about, with an outcome nobody knows.
A worked example (an illustration, not a trade idea)
A made-up stock, XYZ, trades at $100. Earnings come out tonight after the close.
You buy a $100 call that expires in 7 days. IV is high, at 80%, because of the report. The call costs $4.42, or $442 per contract.
The next morning, earnings are out. IV drops to 30%, closer to normal. 6 days are left. Here's what the call is worth at different stock prices (model prices):
| XYZ the next morning | Call worth | Result per contract |
|---|---|---|
| $95 (down 5%) | $0.16 | −$426 |
| $100 (flat) | $1.53 | −$289 |
| $103 (up 3%) | $3.50 | −$92 |
| $105 (up 5%) | $5.19 | +$77 |
| $110 (up 10%) | $10.01 | +$559 |
Look at the $103 row. The stock went up 3%, the direction you guessed, and the option still lost $92.
Look at the flat row. Nothing happened to the stock, and the option lost about two-thirds of its value overnight.
Max loss if held to expiry: $442, the full premium, if XYZ ends at or below $100. Here, just to break even the next morning, the stock needed to rise a bit over 4%. That's a math example, not a promise.
Try your own version in the options profit calculator.
Why the stock had to move so far
Before the report, the 80% IV was pricing in a big move. The expected-move shortcut gives:
$100 × 0.80 × √(7 ÷ 365) ≈ $11, either way.
So the market was already charging you for an $11 move. A $3 move was smaller than expected. The option got cheaper because the event turned out calmer than the price assumed.
In plain words: before earnings, you're not betting on the direction. You're betting the move will be bigger than the market already expects.
Who it helps and who it hurts
| Position | Effect of IV crush |
|---|---|
| Bought calls or puts | Hurts: the option loses value |
| Sold calls or puts | Helps: the option you owe gets cheaper |
| Debit spreads | Hurts less: the sold leg offsets some of it |
| Credit spreads and iron condors | Helps, unless the stock moves past your strikes |
Sellers aren't getting free money, though. A seller who collects a big premium before earnings still loses if the stock jumps past the strike. A big surprise can cost far more than the premium collected. See iron condor explained for how that plays out.
Vega is the Greek to watch
Vega tells you how much an option gains or loses per 1-point change in IV. Before earnings, short-dated options can have IV 30, 40 or more points above normal. Multiply that drop by vega, and you can see the crush coming.
Example: vega of 0.06 and an IV drop of 50 points ≈ $3.00 lost per share, or $300 per contract, from the IV change alone. Our options Greeks guide explains vega in full.
How to check before you buy
- Find the event date. Earnings dates are public. So are CPI and Fed dates.
- Compare IV across expiries. If the expiry just after the event has much higher IV than the one after that, the event is priced in.
- Work out the expected move from the at-the-money IV.
- Ask honestly: do I have a real reason to expect a move bigger than that?
- Write the max loss in dollars, as if the option goes to zero.
Ways traders reduce the effect
- Wait until after the event. IV is usually lower, so options cost less. You give up the gap, but you also skip the crush.
- Use a spread instead of a single option. The sold leg loses value too, which softens the blow. See vertical spreads explained.
- Choose a later expiry. Its IV is usually less inflated by one event, so less falls out.
- Skip it. Not every event needs a trade.
None of these removes risk. They change its shape.
Common mistakes
- Buying options the day before earnings because a big move "feels" likely. The price may already assume it.
- Judging the trade by the stock alone. "It went up" isn't the same as "the option went up."
- Selling options before earnings without a max loss. The crush helps until the gap hurts.
- Forgetting index options. CPI and Fed days can crush short-dated index options too.
Try it today (no money needed)
- Find a large company with earnings this week.
- The day before, write down the at-the-money option's price and IV for the nearest expiry after the report.
- Work out the expected move in dollars.
- The morning after, write down the new price, IV and the stock's move.
- Was the move bigger or smaller than expected? Did the option rise or fall? Log 5 of these.
Questions
What is IV crush in options?
It's a sharp drop in implied volatility after a known event, like earnings. Because IV is part of every option's price, both calls and puts usually lose value when it falls.
Why did my call lose value after earnings when the stock went up?
The stock likely moved less than the options were priced for. When implied volatility dropped after the report, it took more value out of the option than the stock's move added.
How do you avoid IV crush?
You can't avoid it on a bought option held through the event. Traders reduce it by waiting until after the event, using spreads, or choosing expiries less affected by the event.
Does IV crush happen on CPI or Fed days?
It can. Short-dated index and ETF options often carry higher implied volatility before major releases, and it often falls once the data or decision is out.
Do option sellers always win from IV crush?
No. The crush helps sellers only if the stock stays within a range. A move bigger than expected can cost them far more than the premium they collected.
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