Volatility Crush

Volatility crush (also called IV crush or volatility collapse) occurs when implied volatility drops suddenly, usually after an anticipated event such as an earnings announcement, FDA decision, or economic data release. Before such events, uncertainty drives implied volatility higher as traders bid up option premiums to hedge or speculate. Once the event passes and uncertainty resolves — regardless of whether the news is positive or negative — implied volatility reverts, often dramatically. This collapse can cause option prices to fall even if the underlying moves in the expected direction, frustrating traders who bought options before the event. For example, a stock might gap up 5% on good earnings, yet call options purchased before the report could lose value because the IV crush overwhelms the directional gain. Sophisticated traders sell options or use credit spreads before events to profit from volatility crush, while option buyers may use strategies like calendars or back-ratios to mitigate IV crush risk.