IV Crush
Definition
IV crush is the rapid collapse in implied volatility immediately after a major binary event — such as earnings, an FDA decision, or a Fed announcement — that causes options prices to plummet even if the stock moves in your predicted direction.
Example
“I bought calls before earnings expecting the beat to send the stock up. The stock jumped 5%, but my options lost 40% of their value because IV collapsed from 180% to 45% overnight — a textbook IV crush.”
Detailed Explanation
IV crush happens because options pricing is forward-looking. In the weeks before an earnings report, IV expands as market participants bid up options to hedge and speculate on the unknown outcome. The moment the earnings are reported — even if the result is exactly what you predicted — the uncertainty is gone. The event that justified elevated IV has passed, and option market makers immediately reprice at a much lower volatility assumption. This repricing is the crush, and it can easily overwhelm a correct directional bet.
The math can be brutal. Imagine a stock trading at $50 with options priced for a ±12% implied move (±$6). If IV was 150% pre-earnings and drops to 40% post-earnings, the extrinsic value in your options collapses regardless of what the stock does. A $3 call that was all extrinsic value might become worth $0.80 even if the stock moves in your direction by 5% but not enough to make the option deeply in the money. The direction was right; the sizing and structure were wrong.
The two ways to handle this: either don't buy options heading into earnings (sell spreads instead and collect the premium that gets crushed), or if you insist on buying, buy deep in-the-money options where the extrinsic component is small relative to intrinsic value — those get hit less by IV crush. Some traders specifically target IV crush as a strategy by selling straddles or strangles before earnings, banking on the post-event volatility collapse to make the short premium profitable. Know what you're buying and whether there's a binary event ahead before entering any long options position.