Module 8 · Lesson 9 of 13 · Options · About 5 minutes

Earnings and IV Crush: Why Options Can Lose Value After the News

On this page
  1. What you will learn
  2. Why does implied volatility rise before earnings?
  3. What is IV crush?
  4. How can an option lose value when the stock moves “the right way”?
  5. IV crush diagram
  6. Where do readers find the information?
  7. What this does not tell you about earnings and options
  8. Method in Practice
  9. Check yourself
  10. Reflect on your own process
  11. Sources

Before you read: Implied Volatility and the Expected Move Explained

What you will learn

  • How scheduled uncertainty can be reflected in option prices without IV following a guaranteed pre/post-event path.
  • Distinguish an all-else-equal volatility sensitivity from the combined effect of stock price, time and IV changes.
  • Reproduce a declared theoretical before/after valuation and separate intrinsic/extrinsic value from actual executable premiums.

Why does implied volatility rise before earnings?

If a company reports results after the close, what happens to uncertainty about tomorrow’s open?

It need not rise on a fixed schedule. A known announcement can add uncertainty about future prices; options spanning it may embed that risk. Quoted IV also depends on the chosen option/model, time remaining and all other priced risks. Time passing does not mechanically force IV upward, nor does knowing an announcement time reveal its price impact. “Event volatility” is a useful context label, not a measured universal pre-earnings pattern in this lesson.

What is IV crush?

Once the news is out, what part of the uncertainty is gone?

“IV crush” describes a fall in implied volatility, often discussed after a scheduled uncertainty is resolved. It is not guaranteed after every announcement. In the ordinary vanilla pricing model used below, lowering volatility while holding other inputs fixed reduces call value. But the actual total premium change also reflects underlying price, time, rates, dividends, exercise features and market bid/ask conditions. “Lower IV” is not “every option loses money regardless of price movement.”

How can an option lose value when the stock moves “the right way”?

In a fictional example, a stock rises 3% after earnings. Why might a call bought the day before be worth less?

Use a fully specified model, not a comparison between a stock move and an unnamed “expected move.” All data below are authored fiction.

Assumptions: European call; same strike K=$100/share and expiry across scenarios; no dividends; continuously compounded risk-free r=0; constant supplied volatility within each valuation; calendar time T=days/365; lognormal Black–Scholes framework, no jumps, transaction frictions or early exercise in the model. Before has 7 calendar days remaining; after is exactly one calendar day later, with 6 days remaining. Each after row is an ALTERNATIVE scenario, not a new trade. These assumptions simplify real earnings risk; they do not model an observed event or claim exact American-option pricing.

Define Φ as the standard-normal cumulative distribution function:

d1=[ln(S/K)+(r+σ²/2)T]/(σ√T); d2=d1−σ√T.
Call c=SΦ(d1)−Ke^(−rT)Φ(d2), dollars/share.
Intrinsic=max(S−K,0); extrinsic=c−intrinsic.

Scenario S ($/share) K Calendar days Annual σ Call ($/share) Intrinsic Extrinsic
Before 100 100 7 80% 4.417541 0.000000 4.417541
After, IV unchanged control 103 100 6 80% 5.822540 3.000000 2.822540
After, IV20% 103 100 6 20% 3.160724 3.000000 0.160724
After, IV40% control 103 100 6 40% 3.911980 3.000000 0.911980
Alternative S110, IV20% 110 100 6 20% 10.000065 10.000000 0.000065

Reproduction details: σ80%=0.8, not 80; T is 7/365 or 6/365, not 7 or 6. Insert each row’s inputs into the same formula. The normal-CDF intermediates are:

Scenario d1 d2 Φ(d1) Φ(d2)
Before 0.055393981 -0.055393981 0.522087705 0.477912295
S103/IV80% 0.339467393 0.236897670 0.632871171 0.593631911
S103/IV20% 1.165551341 1.139908911 0.878102055 0.872837874
S103/IV40% 0.602007494 0.550722632 0.726415425 0.709088086
S110/IV20% 3.729714568 3.704072137 0.999904152 0.999893917

For the before row, T=0.0191780822 and σ√T≈0.1107879624; d1≈0.0553939812 and d2≈−0.0553939812. c=100×Φ(d1)−100×Φ(d2)≈$4.417541/share. After S103/IV20%, intrinsic 103−100=$3; extrinsic≈$0.160724; call≈$3.160724.

The stock rises $3, or 3%, yet this assumed repricing lowers the call by $1.256817/share. With a fictional 100-share multiplier and $2 fixed total entry/exit costs per contract, marking/selling at these model values gives approximately −$125.68 gross and −$127.68 net. The model marks are not promised bid/ask fills.

To isolate volatility at the same after S103 and 6 days, compare IV80% with IV20%: call falls from 5.822540 to 3.160724, a change of −$2.661815/share. This is a controlled input comparison. The overall before→after change also includes the stock/time changes, so a linear delta/vega shortcut is not an exact attribution.

The alternative S110/IV20% call≈$10.000065 demonstrates a different result under stated inputs, not “a $10 rise always overcomes crush.” Actual American exercise, jumps, skew and liquidity can differ from this no-jump European model. Values were independently checked by direct integration of the discounted lognormal payoff; compute at full precision, then round displayed results. See Option Premium: Intrinsic Value, Time Value and Moneyness, The Option Greeks in Plain Language: Delta, Gamma, Theta, Vega and Implied Volatility and the Expected Move Explained rather than guessing premiums from an expected-move number.

IV crush diagram

Five model European-call values, each a bar on one shared scale of call dollars per share (0, 5, 10.000065), with its inputs. Before: S=$100, K=$100, T=7/365 year, annual σ=80%, call $4.417541/share. Then four after rows, all with K=$100 and T=6/365 year: IV unchanged control (S=$103, σ=80%), $5.822540; IV20% (S=$103, σ=20%), $3.160724; IV40% control (S=$103, σ=40%), $3.911980; and the alternative S110 / IV20% (S=$110, σ=20%), $10.000065.
Read the diagram step by step
  1. Authored fiction. Education only; not market observations.
  2. Fixed model assumptions
  3. European call; same K=$100/share and expiry. No dividends; continuously compounded r=0. Lognormal Black–Scholes; constant supplied volatility per valuation. Calendar T=days/365 year. No jumps, transaction frictions or early exercise in this model.
  4. After rows are ALTERNATIVES
  5. Before: 7 calendar days remaining. Each after row is exactly one calendar day later, with 6 days remaining. Not sequential trades or an observed IV path.
  6. ALTERNATIVE AFTER SCENARIOS
  7. Compare like with like
  8. Compare S103 / 6-day after rows to isolate volatility. Before/after also changes stock and time. IV need not follow a universal event schedule. Model marks are not promised bid/ask fills.
  9. Model limits
  10. These assumptions simplify real earnings risk; they do not claim exact American-option pricing. Jumps, skew, liquidity and actual exercise can differ.
  11. Fictional model calculations, not quotes or an observed IV path. Compare after rows with identical stock/time to isolate volatility; before/after also changes stock and time. Education only; no prediction.

Illustrative diagram constructed for teaching. Not real market data.

Fictional model calculations, not quotes or an observed IV path. Compare after rows with identical stock/time to isolate volatility; before/after also changes stock and time.

Where do readers find the information?

Where is the earnings date published, and where are the options priced?

Companies announce report dates on their investor relations pages, usually in a press release. Earnings calendars from data providers collect them. A live option chain from a broker shows current implied volatility by expiration. Dates can change, so the company’s own announcement is the primary source.

What this does not tell you about earnings and options

No actual earnings outcome, price, IV path or executable option premium is predicted. A scheduled event need not produce a fall in IV; risk can remain or increase. The model is European/no-dividend/lognormal and does not reproduce American early exercise or event jumps exactly. Neither a smaller-than-proxy stock move nor high IV by itself establishes profit/loss or cheap/expensive options. Exercise/resulting-position risks are separate; see Exercise, Assignment and Settlement: What Happens at Expiration.

Method in Practice: break-even inside the implied move

Fictional example. John, Harbor Index futures, the prices, times, costs and results are all invented for teaching. This shows how a written plan can be built and tested. It is not a recommendation, and nothing here says how often this idea works.

Try it on a real chart. Test this idea yourself on past sessions with bar replay. Keep your own count, including the days with no trade.

The idea. Before an earnings report, option prices include a lot of implied volatility, and it often falls afterwards (this lesson). John only buys a call through Pinecrest Tools' report if the move needed to break even is smaller than the move the options market implies.

John's plan (Pinecrest Tools at $50.00, implied move ±$3.50)

Enter if
a 52 call costs little enough that break-even at expiry is within $3.50 of the price. Buy 1
Wrong if
the whole premium is the planned loss
Manage
sell at market 30 minutes after the next open
Risk
$150 maximum, costs included

Three outcomes

  • Big gap up: stock to $55.00. Call sold for $3.05 → +$183.70

  • Up, but not enough: stock +3% to $51.50. IV fell, call sold for $0.35 → −$86.30

  • No trade: next quarter the call cost $2.40. Break-even needed +$4.40, more than the $3.50 implied move → $0

Show the full replays
ReplayWhat happenedResult after costs
ABought the 52 call at $1.20 (break-even $53.20, $3.20 above the price, within $3.50). Stock opened $55.00. Sold at $3.05$185 − $1.30 = +$183.70
BSame call at $1.20. Stock opened $51.50. Sold at $0.35−$85 − $1.30 = −$86.30
CThe 52 call cost $2.40. Break-even $54.40 = +$4.40, more than $3.50$0

Test it yourself

  • Before each report, write the implied move and your break-even move side by side.
  • Log the call's value before and after each report in your sample.
  • Count how often a correct direction still lost money.

Where it breaks

  • Being right on direction isn't enough if the move is small (the failed replay).
  • IV may not fall, and risk can stay high after a report.
  • Option prices after the report can't be known in advance.

Reflection question: Have you ever been right on direction and still lost on an option? What did your plan miss?

Check yourself

  1. At S103/K100, what is intrinsic value and why is it not the whole premium?
  2. Hold after S103 and 6 days fixed. What happens in the declared model when IV rises 20%→40%?
  3. Recompute the before→after 20% contract P&L with costs. Why is it a scenario?
  4. Why might an earnings release reduce IV even though a stock still moves, and is the IV decrease guaranteed? Hint: what uncertainty is gone?
  5. Where should a scheduled earnings date be confirmed, and what should be done if a third-party calendar disagrees? Hint: the company itself.

Reflect on your own process

For your own notes; there is no score and no right answer.

  1. Where does your written process tell you to confirm an earnings date, and what do you do if two calendars disagree?
  2. When you review an event-week position, do you record IV before and after as well as the price change?
  3. Which model inputs would you write down so someone else could reproduce your option valuation?
  4. Have you ever been right on direction and still lost on an option? What did your plan miss?

Sources

Last reviewed . Spotted a mistake? Report an error.