IV Crush

Options are priced using models that factor in expected volatility. Before a known event (earnings, FDA decision, product launch), the market knows a big move is coming — it just does not know which direction. This uncertainty inflates implied volatility, and therefore option premiums, across all strikes.

The moment the event occurs, the uncertainty resolves. Whether the stock gaps up 5% or down 3%, the "unknown" is now known. IV drops to reflect the new, lower level of uncertainty. This collapse happens overnight, between the close before earnings and the open after.

Example: AAPL is trading at $190. Before earnings, a $190 call expiring in 2 weeks costs $8.00 with IV at 55%. After earnings, AAPL moves up 2% to $193.80. But IV drops to 28%. The call is now worth $5.50 despite the stock being higher. The $3.80 of intrinsic value gained from the directional move was more than offset by the $6.30 of extrinsic value lost from the IV collapse. Net result: a $2.50 loss on a "correct" directional trade.

The "expected move" is the range the options market is pricing in for the earnings event. You can calculate it roughly using the at-the-money straddle price.

Formula: Expected Move = ATM Straddle Price / Stock Price x 100

If TSLA is at $250 and the ATM straddle (call + put at the $250 strike) costs $20, the expected move is $20 / $250 = 8%. The market is pricing in an 8% move in either direction.

If you believe the actual move will be larger than 8%, buying the straddle is profitable — the directional gain exceeds the IV crush. If you believe the move will be smaller than 8%, selling the straddle profits from IV crush as the premium decays.

Historical data helps calibrate: if a stock has moved an average of 5% on its last 8 earnings reports, but the current straddle prices in 10%, the options are expensive relative to the stock's typical earnings behavior. This is a high-probability IV crush selling opportunity.

Key metric: IV Rank and IV Percentile tell you how elevated current IV is relative to history. An IV Rank above 70 before earnings means IV is near its 52-week high, suggesting significant crush potential.

Short Straddle/Strangle: Sell the ATM straddle or a slightly out-of-the-money strangle before earnings. If the stock stays within the expected move range, both options lose value rapidly as IV collapses. Risk: unlimited if the stock makes a very large move beyond the straddle width.

Iron Condor: Sell an OTM call spread and an OTM put spread simultaneously. Defined risk version of the short strangle. Maximum profit when the stock stays between the short strikes. The IV crush causes all four legs to lose value, and you keep the credit received.

Calendar Spread: Buy a longer-dated option and sell a shorter-dated option at the same strike. The front-month option experiences more IV crush than the back-month, creating a profit as the spread widens. This works when IV crush is concentrated in the near-term expiration.

Butterfly Spread: Buy a wide butterfly centered at the current stock price. Low cost, defined risk, and profits if the stock stays near the center strike — which is the most common outcome after earnings (stocks move less than expected more often than more).

Rule 1: Never buy naked calls or puts right before earnings unless you expect the move to significantly exceed the expected move priced into options. Check the straddle price and historical earnings moves first.

Rule 2: If you must hold a directional options position through earnings, use a debit spread instead of a naked option. Spreads partially hedge IV crush because both legs lose IV value — the short leg you sold gives back IV premium, offsetting some of the crush on the long leg.

Rule 3: Buy options well before earnings (2-3 weeks out) when IV is still low, then sell before the actual report. This lets you profit from the IV expansion leading into earnings without holding through the crush.

Rule 4: Choose options with longer expiration dates (45-60 DTE rather than weeklies). Longer-dated options are less sensitive to IV crush because the time value is spread over more days. A weekly option can lose 40% of its value from IV crush alone; a 60-DTE option might lose only 10-15%.

Rule 5: Check IV Rank before any earnings trade. If IV Rank is below 30, there is less IV premium to crush — buying options is safer. If IV Rank is above 70, IV crush will be severe and selling premium is more appropriate.

While earnings is the most common IV crush trigger, it happens around any scheduled binary event:

FDA decisions for biotech stocks — IV can exceed 100% before an approval/rejection. The crush after the decision is often 50-70%, dwarfing even the largest earnings crushes.

Federal Reserve meetings — Especially when rate decisions are uncertain, IV on SPY and QQQ options rises into FOMC announcements and collapses afterward. Selling strangles before FOMC meetings when the decision is widely expected has been a historically profitable strategy.

Product launches — For companies like Apple or NVIDIA where new product reveals are major catalysts, IV rises into the event.

Court rulings, elections, and trade deal announcements all follow the same pattern: uncertainty inflates IV, resolution crushes it.

The unifying principle: IV crush occurs whenever known uncertainty resolves into known certainty, regardless of the direction of the resulting price move.