What Is IV Crush?
IV crush is the sudden drop in implied volatility (often 20-50%) that occurs after a binary event the market was pricing in — most often earnings, FDA decisions, or court rulings. Once the uncertainty resolves, options no longer command the inflated premiums of the pre-event period.
The classic IV crush example: a stock is trading at $100 with at-the-money straddles priced at $5 (suggesting a 5% expected move). The stock actually moves 4% after earnings — but the straddle now trades at $2 because IV collapsed from 80% to 40%. The trader who bought the straddle is down even though they were directionally right.
Defending against IV crush: avoid buying options into earnings unless you expect a move much larger than the implied. Better strategies for earnings: vertical spreads (limited exposure to IV), calendar spreads (long back-month, short front-month — captures crush asymmetrically), or selling premium when IV Rank is high.
Related terms
- Implied Volatility (IV) — Market-expected future volatility, derived from options prices.
- Vega — Sensitivity of an option's price to a 1-point change in implied volatility.
- Straddle — Buying both a call and a put at the same strike — bets on a large move in either direction.
- Iron Condor — Four-leg neutral strategy collecting premium when the underlying stays in a range.