Earnings IV-Crush Plays

What it is

Before a company reports earnings, the implied volatility of its options rises to price the expected gap. Immediately after the report, that uncertainty is resolved and implied volatility collapses, an effect called iv-crush. An IV-crush play sells options (or option structures) into the elevated pre-earnings IV and closes them the morning after the report. The most common structures are a short strangle or iron-condor opened the afternoon before the report, or a calendar that sells the earnings-week expiration. This article is deliberately balanced: the crush is reliable, but the size of the move is not, and the trade is a bet on the move being smaller than the market priced.

The logic

The market prices an "expected move" for earnings, roughly the price of the at-the-money straddle. Historically, the realised move has been smaller than the expected move somewhat more often than not, which gives a small statistical edge to sellers of the straddle. The IV crush is the mechanism by which that edge is paid: even if the stock moves modestly, the short options lose most of their extrinsic-value overnight.

The other side is buyers of earnings straddles and single options: speculators betting on a big move, and holders hedging a position through the event. When the stock moves more than the expected move, they are paid from the seller's losses, and single-stock earnings moves have fat tails.

Setup rules

Market: large caps with liquid weekly options and a long history of earnings moves; iv-rank above 60 in the earnings expiration. Never small caps or biotech-style binary events.
Timeframe: open in the last hour before the report (after the close or before the open, depending on the company's schedule); close within the first hour of trading after the report.
Structure choice: a defined-risk iron-condor with short strikes at or beyond the expected move and wings 5 to 10 percent further out is the only version this wiki treats as appropriate for a retail account; undefined-risk short strangles are described for completeness and not endorsed.
Expected move check: compute the market's expected move from the at-the-money straddle; compare it with the stock's actual moves over the last 8 reports. Only trade names whose realised move has been below the expected move in at least 5 of the last 8.
Disqualifiers: a report that includes a major strategic announcement, guidance change or spin-off; a stock with short-interest above 15 percent (squeezes blow through call wings); a company reporting for the first time as a public entity.

Entry, stop, target

Sell to open the condor for a credit shortly before the close on report day. There is no intra-trade stop because the market is closed when the move happens; the wings are the stop. Target: close the whole structure at the open after the report for whatever is left, typically 60 to 80 percent of the credit on a quiet result and a loss capped by the wings on a large move. Never hold the structure into a second day hoping for recovery; the crush has already happened and there is nothing left to earn.

Item	Value	Notes
Stock price	120.00, expected move 7 percent (8.40)	From the straddle
Put spread	Sell 110, buy 105	Just beyond the expected move
Call spread	Sell 130, buy 135	Just beyond the expected move
Credit	1.40 per share ($140)	Wings 5.00
Maximum loss	3.60 per share ($360)	On a move beyond 135 or below 105
Typical result on a 4 percent move	Close at 0.40, gain $100	Crush does the work
Result on a 12 percent move	Maximum loss $360	Occurs several times a year across a portfolio
Approximate R:R	Risk $360 to make about $100, 0.3R	Needs a win rate above 78 percent

The R:R is unforgiving. The condor version needs a high win rate to be profitable at all, and its wins are small; a single "well outside the expected move" report offsets three to four wins.

Position sizing and risk

Size by the maximum loss at /tools/position-size and risk no more than 0.5 percent of equity per report, because the loss is not controllable once the market closes. Never run several earnings condors in the same sector on the same night; one company's surprise moves the others. Follow /learn/risk-management on event risk: the position is a binary bet with a known worst case, and it should be sized as one.

What breaks it

Fat tails. Earnings moves of 2 to 3 times the expected move happen regularly, and they take the structure to its maximum loss. The historical "realised move is smaller" edge is a slight majority, not a law.
Assignment and pin risk at expiration if the trade is on the expiration week and left open; close it the morning after, always.
Costs. Four legs on a $140 credit; commissions and spread crossing can be 15 to 20 percent of the credit.
Edge decay. Earnings vol-selling is widely practised and the expected move has become better calibrated; the sellers' edge has narrowed noticeably in large caps over the last decade.
Selection bias in your own memory. Traders remember the ten quiet wins and forget the two losses that outweighed them. The journal, not memory, is the record.

How to test it

Build a table of the last 8 to 12 earnings reports for each candidate stock: expected move (from the straddle price the day before, which needs historical option data or a reliable archive), realised move, and the condor's approximate P&L under your rules. Across 30 stocks that gives 300 or more events. Compute win rate, expectancy per event and the worst 5 outcomes. If the expectancy is positive only before costs, or only in a few names, the play is marginal. Paper-trade one earnings season (about 30 events) before risking money, and record fills at the open after the report, which are worse than any model assumes.

Variations

Earnings calendar: sell the earnings-week expiration against a later month; see calendar-diagonal-spreads. Different risk shape, still exposed to a large move.
Post-crush debit spread: buy a directional spread after the crush to play the drift; see post-earnings-drift.
Straddle buyer's version: the inverse bet, buying before the report on names with a history of exceeding the expected move; the edge is thinner and the drag from crush is severe.