What is a volatility crush?

Why implied volatility falls after the event

Before a scheduled event such as an earnings report, options for the nearest expiration price in the uncertainty of the announcement. Once the result is public, that uncertainty is gone, and implied volatility drops back towards its usual level, often within minutes of the next open. Later expirations are affected less, because the event makes up a smaller share of their remaining life. The crush is therefore strongest in short-dated options.

Sizing the risk before the event

The useful comparison is between the move the options price in and the move you expect. The cost of an at-the-money straddle gives a rough estimate of that priced-in move. A long straddle bought before the event needs the stock to move more than that amount just to break even, because the extrinsic value it paid for largely disappears afterwards. A short-vega position profits from the drop but carries the full risk of a move larger than priced.

The common misreading

A volatility crush is not a mispricing waiting to be exploited. Implied volatility is high before the event because the event can genuinely move the stock, and selling into it means accepting that risk at a known price. The crush only feels predictable in hindsight, after a quiet result; after a large surprise, the short side loses far more than the drop in implied volatility gives back.

Worked example

Hypothetical numbers for illustration, not a market quote and not a recommendation.

An example stock trades at 100 € the day before its earnings report. The at-the-money straddle for the nearest expiration costs 8 € per share, or 800 € per contract, so the options price in a move of roughly 8 €.

The next day the stock opens at 105 € and implied volatility drops sharply. The call is now worth 5.40 €, the put 0.30 €, together 5.70 €. Despite a 5 € move, the straddle has lost (8 − 5.70) × 100 = 230 €. Only a move beyond about 8 € would have covered the cost. Fees are ignored.

Strategies where the term matters

• Long Straddle — Does the move have to be bigger than the one the market has already priced in?
• Short Strangle — Why are you giving up the protective wings of an iron condor?
• Jade Lizard — Is the credit genuinely larger than the width of the call spread?

Calculators for this term

• IV Percentile + Theta Decay

Track it in your journal

• Options trading journal for spreads and multi-leg strategies

Related terms

• Implied volatility
• Vega
• Extrinsic value (time value)

Every term in one place: the options glossary.