Pre-earnings IV crush

IV crush is one of the most reliable and most misunderstood phenomena in options trading. It's the sharp collapse in implied volatility that occurs immediately after a major scheduled event, most commonly earnings, and it can cause options buyers to lose money even when they correctly predicted the direction of the stock's move.

Why IV rises before earnings

In the days and weeks leading up to an earnings announcement, uncertainty is high. Nobody knows whether the company will beat or miss estimates, what guidance will look like, or how the market will react. Options traders, both hedgers and speculators, bid up option prices to account for this unknown outcome.

This demand pushes implied volatility higher. IV for near-term options can sometimes double in the week before earnings for heavily traded names.

Why IV collapses after earnings

Once earnings are announced, the uncertainty is resolved. The unknown becomes known. Whether the stock beats, misses, or meets expectations, the catalyst that was driving uncertainty is gone.

This resolution triggers an immediate collapse in implied volatility, often within minutes of the announcement. The uncertainty premium that had been built into option prices evaporates, and options become significantly cheaper almost instantly.

This collapse is IV crush.

Why direction alone isn't enough

Here's the trap that catches many options buyers. Suppose you buy a call option before earnings expecting the stock to rise. The stock does rise, 5%. But your call loses value.

How? Because the IV collapse deflates the option's extrinsic value faster than the intrinsic value gained from the move. If IV drops from 80% to 25% overnight, the vega-driven loss can more than offset the delta-driven gain.

Example:

AMZN is at $190 before earnings. You buy the $195 call for $4.00. IV is 75%.

Post-earnings: AMZN rises to $196. IV drops from 75% to 28%.

• Intrinsic value: $1.00 (stock at $196, strike at $195)
• But IV crush has decimated extrinsic value
• Call is now worth $1.20, you paid $4.00 and lost $2.80 despite being right on direction

How to measure the risk of IV crush

Before buying options into earnings, compare:

1. The implied move, what the options market is pricing in as the expected move
2. Historical actual moves, how much the stock has actually moved on past earnings

If the implied move is consistently larger than historical moves, options are overpriced. Sellers have the structural edge.

Use Stryke's Implied Earnings Move tool to see the current implied move vs historical moves for any ticker going into earnings.

Strategies that benefit from IV crush

Rather than buying options into earnings and hoping the move is large enough to overcome IV crush, many experienced traders do the opposite, they sell options before earnings to harvest the inflated IV.

Common approaches:

• Short strangle: Sell an OTM call and OTM put before earnings, profit from the post-earnings IV collapse if the stock stays within the expected range
• Iron condor: Defined-risk version of the short strangle
• Calendar spread: Sell the near-term options (high IV) and buy longer-dated options (lower IV), profiting from the IV differential collapsing

Each of these strategies profits from IV falling after earnings, making them the natural counterpart to buying premium before events.

The risk of selling into earnings

Selling options into earnings isn't risk-free. If the stock makes a move larger than the implied move, the position can take a significant loss. The strategy works statistically over time because IV tends to overstate actual moves, but any individual earnings event can produce an outlier result.

Position sizing is critical. Most experienced traders keep earnings plays small relative to their overall portfolio.

Key takeaways

• IV rises before earnings as uncertainty is priced in
• IV collapses immediately after earnings regardless of the stock's move
• Options buyers can lose money on correct directional calls due to IV crush
• Selling options before earnings to harvest inflated IV is a common professional strategy
• Always compare the implied move to historical moves before trading earnings

Related terms: IV crush, implied volatility, Vega, expected move, short strangle, iron condor

Try it on Stryke: Use the Implied Earnings Move tool to compare implied vs historical moves before every earnings trade.