Volatility crush

What collapses

Volatility crush (IV Crush) is the sudden drop in implied volatility once an event that was lifting it has passed, usually an earnings release. The uncertainty priced into contracts disappears the moment the news is out, so premiums lose a large part of their time value at once, whichever way the stock moves.

Why it happens

Before the event the market knows a move is coming but not which way, so implied volatility swells and every contract gets more expensive. Once the news is out, the unknown is known: there is no reason to pay an uncertainty premium, and volatility is repriced to normal levels within the first minutes of the open.

Its size is real, not marginal

In big earnings stocks, implied volatility on near-dated contracts falls from levels like 60 or 70 percent to the 30s on the morning of the announcement. With the contract's vega, that means losing a sizable part of the premium before any price move is counted. The priced-in Expected Move (taken from the at-the-money straddle price) is the yardstick: below it, the volatility buyer loses even when the direction is right.

Hypothetical example

Just before an announcement: a weekly at-the-money contract priced at $5 prices in a move of about ±6%. Results came out and the stock moved 3% in the right direction: the contract opens near $2.80. The direction was right and the crush ate the difference.

Common mistake

Buying contracts the night before the announcement “because the move is certain”: what is certain is already priced in, and the real bet is that the move will exceed the priced-in move. That is a statistically losing bet in most large names.

Where to see it on the platform

The options calculator shows how a change in implied volatility moves the price directly, and the volatility risk premium gauge measures how much sellers charge above realized volatility. It is the same effect seen from the other side.