IV Crush: Why Options Lose Value Right After Earnings

The report is due after Tuesday’s close. On Tuesday afternoon the chain shows implied volatility near 80% on the nearest expiration. By Wednesday’s open it’s near 35%. The stock moved. It may even have moved your way, and the call you bought on Tuesday afternoon, which looked like a reasonable bet on a good quarter, is still worth less than you paid for it.

How much the drop costs

Implied volatility prices movement the market expects but hasn’t seen. Before earnings that expectation is high, because nobody knows the number. After the report the number is known. The uncertainty drains out of every option on the stock at once.

Vega converts the drop into dollars. It measures the change in an option’s price, per share, for each one-point move in implied volatility.

“All else equal” matters here. The stock also moved, a day of time value also went, and vega itself shrinks as volatility falls, so the real change in the option’s price is the sum of all of these, and the 45 x 0.12 figure is an estimate of one piece. For an option worth $8 before the report, it still means the stock has to move enough to make up more than $5 of value before the call breaks even.

Where it shows on the option chain

Most chains carry an IV column for each strike. Many let you add vega. The morning after a report, implied volatility sits lower across nearly every strike of the near expirations, calls and puts alike, and the change is easy to spot if you saved or remember the previous afternoon’s numbers. The front expiration usually drops most. Later ones fall less.

Before the report, the same chain shows you the setup. Compare the implied volatility of the expiration just after the report with the next one out, and if the near one is far higher, the market has priced a big one-day move into it, which is exactly the premium that disappears once the report is out. The guide to implied vs historical volatility covers how to read that gap against how the stock has actually moved.

A quick way to size the priced-in move is the at-the-money straddle, one call and one put at the strike nearest the stock price in the first expiration after the report. Its combined price, divided by the stock price, is a rough estimate of the move the market expects. On a hypothetical $100 stock with that straddle at $8, the market is pricing a move of about 8% either way.

Who pays and who collects

Option buyers who hold through the event pay for it. They bought expensive volatility and sold it back cheap, so they need a move larger than the one the market priced in just to stand still.

Option sellers collect it. A trader who sold before the report and buys back the next morning keeps the premium that drained away. They also carry the gap risk: if the stock moves further than the priced-in move, the loss on the short option can be far larger than the premium collected, and on an uncovered short call there’s no ceiling on it.

That trade-off is the subject of buying calls before earnings. The earnings season checklist builds the volatility check into the routine.

What people get wrong

The first mistake is thinking a correct call on direction is enough. If a hypothetical stock rises 3% after the market priced in 8%, the call can lose money anyway. Size matters as much as direction.

The second is expecting crush only on the stock that reported. Other names in the same industry can see their implied volatility drop too.

The third is waiting for the crush to reverse. After the event, implied volatility tends to stay low until the next known source of uncertainty comes along, which for most stocks is the next report.

Related terms

Vega measures sensitivity to implied volatility. Implied volatility is the volatility the option’s price assumes. Historical volatility is how much the stock has actually moved. The expected move is the range the options imply for the report. For more on reports and the options around them, see the earnings desk.