IV Crush

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.