What Is IV Crush?

IV crush is the rapid collapse of implied volatility that occurs after a known event — most commonly an earnings announcement. Before earnings, uncertainty is high, so IV inflates. The moment the company reports, that uncertainty disappears, and IV drops sharply. Option premiums can lose 30-60% of their value overnight, even if the stock moves in the expected direction.

A Real Example of IV Crush

NFLX is trading at $650 before earnings. A $660 call expiring in 5 days costs $18.00 with IV at 85%. Earnings come out, NFLX beats expectations and gaps up to $665. You'd expect the $660 call to be worth at least $5 of intrinsic value plus some premium.

Instead, IV drops from 85% to 35% overnight. Your $660 call is now worth about $7.50. You were right about direction, right about magnitude, and still lost $10.50 per contract. That's IV crush in action.

Why Does IV Crush Happen?

Options pricing models assign value based on expected future movement. Before earnings, the expected move is large because nobody knows the outcome. After earnings, the event has passed and the next catalyst may be months away.

The options market is essentially pricing in a binary event. Once the coin flip happens, there's nothing left to price. IV reverts toward its normal, pre-event baseline.

How Much Do Options Typically Drop?

The magnitude of IV crush varies by stock and event, but patterns are consistent:

| Stock Type | Pre-Earnings IV | Post-Earnings IV | IV Drop | Mega-cap tech45-65%20-30%~50% High-growth70-120%35-55%~50-55% Biotech (FDA)100-200%40-70%~60% | Low-vol utilities | 20-30% | 15-20% | ~30% |

A 50% IV drop on a short-dated option can translate to a 30-60% premium loss, depending on how much of the option's value was extrinsic.

Strategies That Profit From IV Crush

Selling strategies benefit because you collect premium before IV drops and buy it back cheaper after:

  • Short strangles/straddles — sell both a call and put before earnings. If the stock stays within the expected move, both sides lose value from IV crush.
  • Iron condors — defined-risk version of the strangle. Cap your loss while benefiting from the premium collapse.
  • Credit spreads — sell a vertical spread before earnings. The short leg loses more value from IV crush than the long leg.

    • Buying strategies that account for IV crush:

  • Calendar spreads — buy a longer-dated option (less IV crush) and sell a shorter-dated one (more IV crush). The short option collapses faster than the long option.
  • Debit spreads — buying a spread rather than a naked option reduces your IV crush exposure because you're simultaneously long and short vega.

    • The Expected Move Framework

    Before earnings, calculate the expected move: take the at-the-money straddle price and multiply by 0.85. If the straddle costs $20, the expected move is roughly $17. The stock needs to move beyond $17 for a straddle buyer to profit.

    Historically, stocks stay within the expected move about 70% of the time. That's why selling premium around earnings has a statistical edge — but the 30% of times it doesn't work can produce large losses without proper risk management.

    Common Mistakes

  • Buying single-leg options through earnings — you're fighting IV crush, theta decay, and delta risk simultaneously
  • Assuming IV crush is priced in — it is, but many traders underestimate its magnitude
  • Ignoring position sizing — earnings trades are binary events; size accordingly (1-2% of account max)

    • OptionsPilot's backtester lets you test how specific earnings strategies would have performed across multiple quarters, giving you data-driven confidence rather than guesswork.