IV crush after earnings: the premium vanishes

What this lesson explains and for whom

This lesson explains why an option premium can fall after an earnings release despite a correct direction, how to measure that effect before entry, and how to build a position that does not pay for the uncertainty that disappears after the release. It is for a reader who knows the basics of option pricing and wants to translate vega into a concrete amount and decide whether to enter an instrument before an event at all. The numbers in the examples are illustrative, and you should confirm the event calendar and publication times at the source.

The premium is not only direction

You buy an option before earnings because you expect a good report. Meanwhile the premium consists of intrinsic value plus time and volatility value. Before the event, implied volatility rises because the market prices uncertainty. After the release, uncertainty disappears, IV falls, and the premium can collapse even with a correct direction. That fall is IV crush.

How IV crush works step by step

Example from the lesson (illustrative numbers): you buy a call for 5.00, of which 3.00 is the volatility component. The report comes out well, the price rises by 1%, delta adds 1.00, but vega takes away 3.00. The net result is -2.00 despite a correct forecast. That is not the market’s fault, it is the structure of pricing. The link between delta, vega, and theta is described in the lesson Greeks in practice.

Measurement: IV versus realised volatility

The level of IV says little until you compare it with the volatility the instrument actually realises. Two numbers are enough.

RV (realized volatility, annualized) = standard deviation
   of logarithmic returns from N sessions × square root of the number of sessions in a year

uncertainty premium (in percentage points) = IV − RV
ratio = IV / RV

Interpretation is qualitative and does not rest on a rigid threshold: when IV is clearly higher than RV, the buyer is paying for a scenario the market has already priced, while sellers have a statistical edge — at the cost of greater move risk. Choose the N period to match the position horizon, and record the result so it can be compared across events. Without comparing IV with RV, high volatility remains an opinion.

How much premium the crush will take: a vega calculation

The effect of an IV change on the premium can be calculated before entry:

vega effect (PLN) = vega × IV change in percentage points × multiplier × number of contracts

Vega on the platform is usually given as the premium change for a one percentage point change in IV, which is why a fall in IV from 60% to 40% enters the formula as -20 points, not as -0.20.

Example (illustrative numbers): vega is 0.05 per contract, you hold two contracts at a multiplier of 100, and IV falls by 20 points. The effect on the result is 0.05 x (-20) x 100 x 2 = -200 PLN (Polish złoty). You compare that same amount with the profit coming from delta, to see how much price movement the crush has to be made up for. Only that difference tells you whether entry makes sense at all — see expected value. Check the multiplier and commission rates with your broker.

Protocol before the report: six steps

1. Enter the publication date and time in the calendar, just like any other element of the plan — see the calendar in practice.
2. Record IV before the report and its background: average and percentile over recent months.
3. Calculate RV over a period close to the position horizon and compare it with IV.
4. Calculate the vega effect in zloty for the scenario in which IV returns to its average.
5. Calculate how much price movement the adopted scenario gives through delta, and set the two numbers side by side.
6. Record the decision: no position, a spread instead of a naked option, smaller size — with a threshold for closing before publication.

Earnings season concentrates events in a short period, so it is worth knowing its calendar before you plan a position — see the earnings season lesson.

Event journal: table to fill in

Fill it in after each event. Three entries give more than three opinions.

How to limit vega exposure

The other side is symmetrical: sellers of options before an event collect a premium for uncertainty, but accept the risk of a delta jump and a loss larger than the premium collected. That is a decision about strategy profile, not a safer route — the comparison of profiles is in the lesson basic option strategies.

When the calendar says do not trade

1. You do not know the exact date or time of publication. A position opened sometime this week is a bet on the calendar, not on the thesis.
2. IV is clearly higher than realised volatility, and the thesis is about direction only. You are then paying for uncertainty the market has already priced, and exposing yourself to the crush with no compensation.
3. You cannot calculate the vega effect in zloty. Without that calculation you do not know the maximum loss of the scenario in which IV returns to its average.
4. Position size is larger than in the plan because the report will surely be good. A conviction about the event outcome does not change the distribution of possible price results.

Typical mistakes

• Buying options before a report without checking IV — the premium contains a fee for uncertainty that disappears after publication.
• Confusing a fall in IV with a fall in the underlying price — the premium can fall while the price rises; those are two different variables.
• Treating the crush as bad luck — it is a predictable part of pricing that can be calculated before entry.
• Selling naked options for the crush without a loss limit — the premium collected is often many times smaller than the loss on a large price gap.
• Planning entry while ignoring the calendar — an event that is not in the trading plan surprises you exactly when the position is largest.
• Not recording the result after the event — without a journal you do not know whether the loss comes from direction or from vega.

Measurable exercise

Choose an instrument that publishes a report in the coming weeks. Run the protocol from this lesson: record IV, calculate RV over a chosen period, calculate the vega effect in zloty for a 20-point fall in IV (an illustrative number), and compare it with the profit coming from delta on the move you expect. Fill in the event journal after publication, even if you did not open a position. Goal: three completed journal rows and one number — how much premium the crush took in each case.

Common questions

Does buying options before earnings always lose?

Not always, but the price contains an uncertainty component that will disappear after publication. If the price move does not make up for the fall in vega, the result will be negative despite a correct forecast. That is why both parts must be calculated before entry: the move from delta and the loss from vega.

How do I measure whether IV is high?

Compare it with realized volatility over a period close to the position horizon, and with its own average and percentile. A number without a reference point says nothing — high relative to what?

Is selling options before earnings a safer route?

It is a different game: you collect a premium for uncertainty, but you accept the risk of a delta jump and a loss larger than the premium collected. The choice depends on the strategy profile and the loss limit, not on a conviction that the crush must occur.

Why measure IV and RV when the report cannot be predicted anyway?

Precisely because the report cannot be predicted, you measure what is measurable: the price of uncertainty. When IV is clearly higher than RV, the buyer is paying for a scenario already priced, and the outcome depends on whether the actual move beats market expectations. Without that comparison you do not know whether you are buying cheap or expensive risk — and that is one of the few variables you really control before an event.