IV Crush: The Silent Profit Killer

What is IV Crush?

IV crush occurs when implied volatility rapidly decreases, typically after an earnings announcement or major event. Even if the stock moves in your favor, your option can lose value due to volatility contraction.

Why IV Crush Happens:

• Event Uncertainty Resolved: Earnings remove uncertainty
• Demand Drops: Fewer traders buying options after event
• Vega Impact: Options with high vega suffer most
• Predictable Pattern: Happens after every earnings

Real Example of IV Crush

Before Earnings:

• Stock: $100
• ATM Call IV: 60%
• Call Premium: $5.00

After Earnings (Stock up $3):

• Stock: $103 (3% gain!)
• ATM Call IV: 30% (50% drop)
• Call Premium: $4.50 (10% loss despite stock up)

How to Identify IV Crush Risk:

• Check IV Rank before buying
• Compare current IV to historical average
• Look at IV term structure slope
• Monitor days until earnings

Strategies to Avoid IV Crush:

1. Don't Buy Options Before Earnings

• IV usually highest right before announcement
• Buying at peak IV = paying maximum premium
• Stock needs massive move to overcome vega loss

2. Sell Options Before Earnings (Advanced)

• Sell high IV, buy back after crush
• Short straddles/strangles capture premium
• Warning: Unlimited risk if stock gaps

3. Use Defined-Risk Spreads

• Debit spreads reduce vega exposure
• Both legs crushed equally
• Directional bet with limited vega risk

4. Buy After Earnings

• Wait for IV to normalize
• Cheaper options post-crush
• Better risk/reward setup

Profiting from IV Crush:

• Sell Iron Condors: Before earnings, profit from crush
• Calendar Spreads: Sell front month before earnings
• Short Straddles: High risk, high reward
• Buy Back Cheaper: Sell high IV, buy back low IV