GLOSSARY // Options
IV Crush
IV crush is the sharp drop in implied volatility the moment a known event passes, deflating option prices even when the stock moves in the buyer's favor. The uncertainty premium built up ahead of earnings or a binary catalyst vanishes overnight because the question it was pricing has been answered.
This is the classic trap in buying options into earnings: the trader gets the direction right and still loses, because the extrinsic value collapses faster than the intrinsic value grows. The stock's move must beat the implied move for a long option or straddle to overcome the crush.
A stock closes at $100 the day before earnings; its weekly 100 call costs $4.80 with IV near 95%. The company reports fine numbers and the stock opens at $103 — but IV collapses to 40%, and the call opens near $3.60 ($3.00 intrinsic plus a thinned-out $0.60 or so of extrinsic). Right on direction, down $120 per contract anyway.
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Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.