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IV crush

The sharp drop in implied volatility, and therefore option prices, once an anticipated event such as earnings has passed.

Before earnings, uncertainty inflates implied-volatility. The moment the news is out, uncertainty collapses and so does the extrinsic-value of every option on that stock, whether the stock moved or not.

Buyers of options into earnings need the stock to move more than the implied move to profit. Sellers are betting it will move less.

Example: a stock at $100 has IV of 80% the day before earnings, with the $100 straddle priced at $9. The next morning the stock is $103 and IV is 35%. The straddle is worth about $4: the buyer lost $5 despite a 3% move.

Related: implied-volatility, vega, earnings-report, straddle

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Payoff of a long straddle at expiryA V shape with its point at the strike and both arms rising through zero as the price moves away.Profit / loss per share08090110120Profit if the move is big enough, in either directionStrike 100Breakeven 92Breakeven 108Max loss 8 — both premiums, if it finishes at 100Underlying price at expiry
Long straddle: payoff at expiry. A 100 call and a 100 put bought together for 8 make a V. A quiet market that ends near 100 costs the whole 8; the position only turns positive once the price finishes below 92 or above 108, whichever way it goes.

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