What is IV crush?
IV crush is a sharp drop in implied volatility that causes an option's price to collapse, even when the underlying stock moves in the expected direction. It most often happens right after a scheduled event (earnings, FDA decisions, major economic data) where the market had priced in the uncertainty.
Why it happens
Before earnings, the market does not know what the stock will do. Traders bid up option premiums to compensate for that uncertainty. IV can run to 2x or 3x its normal level on big-name stocks in the last day or two before the event. That inflated IV is pure extrinsic value.
The moment earnings are released, uncertainty evaporates. IV collapses back to normal levels, and with it, the extrinsic value baked into every option. Traders call this the "volatility crush" or "IV crush."
How it burns beginners
A trader buys an earnings call expecting a beat. The company beats expectations and the stock rises 5 percent. The call should be worth more, right? But IV crush slashes the extrinsic value. The modest stock move does not offset the volatility drop, and the call ends up flat or even down.
How to avoid it
- Check IV percentile before buying. If it is above 80, IV is stretched.
- Avoid buying single calls or puts into earnings unless you are budgeting for a very large move.
- Consider spreads (verticals), which are less sensitive to IV changes.