Vega Crush After Earnings: How to Profit
Before every earnings announcement, implied volatility rises as traders price in the expected move. After the announcement, that uncertainty disappears, and IV collapses—often by 30-60% overnight. This is "vega crush" or "IV crush," and it's one of the most predictable patterns in options trading.
How Vega Crush Works
Before earnings: NFLX is at $700, reporting tomorrow. The weekly ATM straddle is priced at $40 (implying a $40, or ~5.7%, expected move). IV on the weeklies is 85%.
After earnings: NFLX reports and moves $15 to $715. IV collapses from 85% to 35%. The straddle, despite the stock moving $15, drops from $40 to about $18.
The straddle buyer needed a $40+ move to break even and only got $15. The straddle seller collected $40 and can buy back for $18, pocketing $22 per share ($2,200 per straddle).
Why the Crush Is So Severe
Earnings represent a binary event with a known date. Options pricing models build in extra IV specifically for this event. Once it passes:
The magnitude depends on how much IV was elevated. Stocks with high earnings IV premiums (TSLA, NFLX, META) have more violent crushes than stocks with modest premiums (JNJ, PG, KO).
Strategies to Profit from Vega Crush
1. Short Iron Condor
Setup: Sell an OTM call spread and OTM put spread expiring the week of earnings.
Example: AMZN at $185 before earnings. Sell $180/$175 put spread and $192/$197 call spread for $2.40 combined credit.
Why it works: Both sides benefit from IV crush. Even if AMZN moves within the expected range, the vega collapse makes both spreads cheaper to buy back.
2. Short Strangle or Straddle
Setup: Sell OTM call and put (strangle) or ATM call and put (straddle).
Warning: Undefined risk. A massive earnings surprise (think SNAP dropping 25% or META surging 20%) can overwhelm the vega crush benefit. Size these very small.
3. Calendar Spread
Setup: Sell the weekly option (high IV) and buy a later-dated option (lower relative IV) at the same strike.
Why it works: The front-month IV is inflated for earnings. The back-month IV is less affected. When earnings pass, the front-month IV collapses more than the back-month, widening the spread.
4. Diagonal Spread
Similar to the calendar but with different strikes. Sell a weekly OTM option and buy a further-dated option at a different strike. You get vega crush on the short leg plus directional flexibility.
The Risks of Playing Vega Crush
The stock moves more than expected. If NFLX was expected to move $40 but gaps $80, no amount of vega crush saves your short premium. The directional P&L overwhelms the IV collapse.
The crush isn't complete. Sometimes post-earnings IV stays elevated—if the earnings raised more questions than it answered, or if another catalyst is imminent.
Assignment risk on short options. Deep ITM short options after a gap can get exercised early.
How to Size and Select
Expected move: Check the ATM straddle price to see the market's expected move. If you're selling a strangle, place your strikes outside this range.
IV premium: Compare current IV to the stock's average non-earnings IV. The bigger the gap, the more crush potential.
Win rate data: Historically, selling premium before earnings has a ~65-70% win rate depending on the strategy. The wins are frequent but small; the losses are infrequent but can be large. This is why position sizing matters enormously.
Risk per trade: Never risk more than 2% of your account on a single earnings play. The binary nature of the event means you'll have losses, and they need to be absorbable.
OptionsPilot's backtester lets you test earnings premium-selling strategies across historical events, showing you which stocks have the most consistent vega crush patterns and what strike selections have performed best over dozens of earnings cycles.