Volatility crush is one of the most predictable phenomena in options trading. Every earnings season, IV spikes before announcements and crashes afterward - often overnight. Understanding how to trade this pattern can add consistent profits to your trading. This guide covers everything you need to know about volatility crush.
What is Volatility Crush?
Volatility crush is the rapid decrease in implied volatility that occurs after a known event, most commonly earnings announcements. Before the event, IV is elevated because uncertainty exists. After the event, that uncertainty is resolved, and IV drops sharply.
The pattern: IV builds up before earnings over days or weeks, then crashes 30-60% within hours after the announcement. This happens regardless of whether the stock goes up or down.
Why Volatility Crush Happens
IV reflects uncertainty about future price movements. Events create uncertainty:
- Before earnings: Nobody knows if the company will beat or miss, so IV is high
- After earnings: The news is out, uncertainty is gone, so IV drops
- The drop is instant: Once the event passes, there is no reason to pay elevated premiums
Volatility Crush Example
Stock AAPL before and after earnings:
- 1 week before earnings: IV at 35%
- Day before earnings: IV at 52%
- Morning after earnings: IV at 28%
IV dropped 24 percentage points (46%) overnight. This crush happens even if AAPL moved exactly as much as the options predicted.
Events That Cause Volatility Crush
While earnings are the most common, other events also cause volatility crush:
- Earnings announcements: The classic vol crush scenario
- FDA decisions: Biotech stocks before drug approvals
- Product launches: Apple events, Tesla announcements, etc.
- Legal rulings: Court decisions affecting the company
- Economic data: Fed meetings, jobs reports (affects indices)
- Merger votes: Shareholder approval dates
How to Profit from Volatility Crush
The key to profiting from vol crush is being short options (or short vega) going into the event. When IV drops, short options positions gain value.
Strategy 1: Iron Condors Before Earnings
Sell an iron condor expiring shortly after earnings. You collect elevated premium and profit from both the vol crush and time decay.
Earnings Iron Condor Setup
Stock at $100, earnings tomorrow, weekly options expiring in 2 days:
- Sell $95 put, buy $90 put (put spread)
- Sell $105 call, buy $110 call (call spread)
- Collect $2.50 total credit
If the stock stays between $95-$105, you keep most of the premium. Even if it moves to $96 or $104, the vol crush helps your position.
Strategy 2: Credit Spreads
If you have a directional bias, sell a put credit spread (bullish) or call credit spread (bearish) before earnings. The vol crush accelerates your profit if you are right on direction.
Strategy 3: Short Strangles
Sell both OTM puts and calls. Higher risk but higher reward. Best for experienced traders with strict risk management.
Strategy 4: Calendar Spreads
Sell the weekly option that includes earnings and buy the next week or month at the same strike. The front-month option experiences more vol crush than the back-month.
Calculating Expected Move vs Your Position
Before trading earnings, calculate the expected move that options are pricing in:
Expected Move Calculation
Add the price of the ATM straddle (call + put at the same strike) for the nearest expiration after earnings.
- Stock at $100
- $100 call: $4.00
- $100 put: $3.50
- Expected move: $7.50 or 7.5%
The market expects the stock to move roughly $7.50 in either direction. Place your short strikes outside this range for higher probability.
Risk Management for Vol Crush Trades
Vol crush trades can go wrong. Here is how to manage risk:
- Use defined risk strategies: Iron condors and credit spreads limit your maximum loss
- Size small: Earnings are binary events - never risk more than 2-3% of your account on one trade
- Set wide strikes: Give yourself room for larger-than-expected moves
- Close early if winning: Do not get greedy; take profits at 50-75% of max profit
- Have a stop loss: If the position goes against you, cut losses at 1.5-2x credit received
When Vol Crush Trades Fail
Vol crush is predictable, but the underlying stock movement is not. Your trade can fail when:
- The stock moves more than expected: A 15% move beats your iron condor even with vol crush
- Gap beyond your strikes: Stock gaps through your short strike overnight
- IV does not crush enough: Sometimes IV stays elevated if uncertainty remains
- News after earnings: Additional announcements can spike IV again
Reality check: Even though vol crush is predictable, about 25-30% of earnings trades lose money because the stock move exceeds what options were pricing. This is why position sizing is critical.
Choosing the Right Stocks for Vol Crush Trades
Not all earnings are equal. Look for:
- High IV Rank: The higher the IV, the more it can crush
- Liquid options: Tight bid-ask spreads protect your edge
- Predictable movers: Some stocks consistently move less than expected
- Lower guidance risk: Companies with stable forecasts have less surprise potential
Advanced: Trading the Crush with Calendars
Calendar spreads offer a unique way to play vol crush while maintaining long volatility exposure:
Earnings Calendar Strategy
Stock at $100, earnings in 3 days:
- Sell the weekly $100 call expiring in 4 days (includes earnings): $5.00 at 55% IV
- Buy the monthly $100 call expiring in 32 days: $6.50 at 38% IV
- Net debit: $1.50
After earnings, the weekly option experiences massive vol crush and rapid decay. The monthly option loses less. If the stock stays near $100, your calendar profits.
Building a Vol Crush Trading System
- Create an earnings calendar: Know which stocks report and when
- Screen for high IV Rank: Focus on stocks with IV Rank above 50
- Calculate expected move: Use the ATM straddle price
- Select your strategy: Iron condor for neutral, credit spread for directional
- Set strikes beyond expected move: Add a buffer for safety
- Enter 1-3 days before: Capture the final IV buildup
- Close the morning after: Take profits once vol crush occurs
Track Vol Crush Opportunities
Pro Trader Dashboard shows IV Rank before and after earnings, helping you identify the best vol crush setups. See which stocks have the most elevated IV and track your earnings trades.
Summary
Volatility crush is the predictable drop in IV after earnings and other events. Profit from it by selling options before the event and benefiting when IV drops. Iron condors, credit spreads, and calendars are the main strategies. Always calculate the expected move, set strikes outside that range, and size positions small because large stock moves can overwhelm the vol crush benefit. With proper risk management, vol crush trading can be a consistent profit source.
Continue learning with our guide on volatility expansion trading or explore straddle strategies for volatility.