What is Volatility Crush? (Why Options Lose Value After Earnings)
You picked the right stock. You picked the right direction. The stock went up. So why did your option lose money? Welcome to IV Crush.
Quick Summary
Volatility Crush (IV Crush) is the rapid collapse of Implied Volatility after a known event like earnings. Before the event, uncertainty inflates option prices. After? The "hype premium" evaporates instantly. Your option can lose value even if the stock moves in your favor.
It is the classic beginner's tragedy.
You know Apple is about to report amazing earnings. You buy a Call Option the day before the report. The news comes out: Earnings are a smash hit! The stock jumps 3% overnight.
You wake up the next morning, expecting to be rich. You check your account...
And your option is down 20%. You picked the right stock. You picked the right direction. The stock went up. Why did you lose money?
You just became a victim of the Volatility Crush.
The Definition: What is Volatility Crush?
THE MECHANISM
Volatility Crush is the rapid deflation of Implied Volatility (IV) that occurs immediately after a known event passes.
Remember, Implied Volatility measures uncertainty.
Before Earnings
Uncertainty is high. Nobody knows the numbers. Market makers jack up option prices to protect themselves from the unknown.
After Earnings
The numbers are out. The uncertainty is gone. The "premium air" is let out of the balloon instantly.
When IV drops, the price of the option drops—even if the stock price moves in your favor.
The Analogy: The Super Bowl Ticket
Think of an option like a ticket to the Super Bowl.
The Event Ticket Analogy
Friday Before the Game
Ticket Worth: $5,000
Monday After the Game
Ticket Worth: $0
Options don't go to zero instantly like a used ticket, but the "hype premium" evaporates the second the news hits the wire.
The Mechanics: How the Math Works
Let's look at the numbers to see how the crush steals your profit.
Your Position (Before Earnings)
The Event: Good Earnings!
The Damage Report
You were right about direction. The stock went up. But you still lost 70% of your investment because the volatility crush overwhelmed your directional gain.
How to Avoid the Crush
Volatility Crush is predictable. It happens every single earnings season. Here's how experienced traders handle it:
This is the simplest rule. If IV is historically high (IV Rank > 50), buying options is fighting a losing battle. You're paying for premium that is guaranteed to disappear.
Instead of buying, some traders sell options before earnings. They sell Straddles or Iron Condors, collecting the inflated premium today—knowing it will deflate tomorrow regardless of direction.
If you want to trade the stock, wait until 30+ minutes after the market opens post-earnings. The IV will have settled, option prices will be "normal" again, and you can trade pure direction without fighting Vega headwinds.
Frequently Asked Questions
Summary
Volatility Crush is the market correcting itself from "Panic/Hype Mode" to "Normal Mode."
- IV Crush is predictable: It happens after every known event—earnings, FDA decisions, elections.
- Buying high IV = swimming upstream: You need the stock to move more than the "expected move" just to break even.
- Direction isn't enough: Being right about up/down doesn't guarantee profit when IV is inflated.
- Vega is your enemy: High-Vega options suffer the most from the crush.
To trade profitably around events, stop focusing solely on Direction (Up/Down) and start respecting Environment (Volatile/Calm).
