Before a known event, uncertainty is high: nobody knows what the quarterly results will show or what the RBI will announce. Option buyers pay up for that uncertainty, and implied volatility (IV) rises. Once the event happens, the uncertainty is gone, whatever the outcome. IV falls back, often within minutes of the market opening. That sharp fall is called the IV crush.
The crush is a vega effect. Every option, call or put, loses value when IV drops. The loss is biggest for at-the-money options in the expiry closest to the event, because that is where most of the extra IV had been built in.
Which events cause an IV crush
- Company results. The classic case. Stock option IV often climbs in the days before results and drops the morning after. The results calendar lists upcoming dates.
- The Union Budget. NIFTY and BANKNIFTY IV often rise into Budget day and fall soon after the speech.
- RBI monetary policy and US Federal Reserve decisions, especially for BANKNIFTY.
- Election results and other big scheduled announcements.
Unexpected news does the opposite: IV jumps after a surprise. The crush belongs to events everybody could see coming. The economic calendar shows the market-wide ones.
A worked example: results for a ₹1,500 stock
A stock trades at ₹1,500, results are due after the market closes, and the monthly expiry is 10 days away. Before results, the at-the-money IV is 40%. A typical IV for this stock on normal days is about 25%. The numbers below are illustrative, from the usual pricing model:
| 1,500 strike | Before results (IV 40%) | Next day, stock +3% to ₹1,545 (IV 25%) |
|---|---|---|
| Call | about ₹40 | about ₹53 |
| Put | about ₹40 | about ₹8 |
| Straddle (call + put) | about ₹79 | about ₹61 |
The straddle priced an expected move of about ₹79, or 5.3%. The stock moved 3%: a decent move, but smaller than priced. The straddle buyer lost about ₹18 per share even though the stock moved. The call buyer did make money (₹40 to ₹53), but much less than the 3% move alone would suggest: with IV unchanged at 40%, the call would have been worth around ₹64. The rest went to the crush.
Had the stock jumped 8% instead, the straddle would have been worth well over ₹120 and the buyer would have gained. That is the rule of the game: to profit from buying options through an event, the move must beat the move the options priced in. As a rough guide, the straddle buyer here needed about a 5% move to break even the next day.
A live example: how much movement is priced in
The at-the-money straddle shows how much movement the market is paying for. Here is NIFTY's expected move to expiry right now:
If an event falls inside this expiry, part of that range is the event premium. After the event, the straddle usually shrinks quickly even if NIFTY moves a little. You can watch that on the straddle chart:
On the morning after a major event, look at the first half hour: a straddle that opens high and falls steadily while NIFTY holds its level is an IV crush in action.
Measuring the crush in advance
- Compare the event expiry with the next one. If the expiry containing results carries a much higher IV than the expiry after it, the gap is roughly the event premium that will vanish.
- Compare today's IV with the symbol's normal IV. The IV rank or the stock's usual range shows how stretched it is.
- Look at past events. The results moves page compares the move priced before past results with the move that actually happened, stock by stock. Some companies regularly move more than priced, many less.
Why the crush happens so fast
Implied volatility before an event is really two parts mixed together. One part is the normal day-to-day movement the stock has on any day. The other is a one-off lump for the event itself: the gap the stock might make when the news lands. Option prices spread that lump across all the days to expiry, which makes the average IV look very high.
Once the result is out, the lump is gone. The remaining days only need to cover normal movement, so IV snaps back to something close to its usual level at the first trade. There is no slow fade; the market reprices in minutes. This is also why the crush is biggest for the nearest expiry. In a monthly expiry with three weeks left, the event lump is spread over many days and the IV drop is smaller. In a weekly expiry that ends two days after results, nearly all the extra IV belongs to the event, and nearly all of it disappears.
A simple way to think about it: before the event you are paying for the event move plus normal movement; after it, only for normal movement. If the actual gap was smaller than the event move you paid for, you lost on the trade.
A note for index traders
The same effect works on NIFTY and BANKNIFTY around the Budget, RBI policy days and general election results, but it is usually smaller than for single stocks, because an index is a basket and one piece of news rarely moves all its members the same way. India VIX often shows the build-up and the drop clearly. See the India VIX guide for how to read it.
How traders approach IV crush
- Sellers sell options or straddles before the event to collect the inflated premium, aiming to buy back after the crush. The risk is a surprise: a 12% gap on a stock where 5% was priced can cost several times the premium collected. Many sellers use defined-risk structures such as iron condors or iron butterflies.
- Buyers who expect a bigger move than priced may still buy, knowing exactly what move they need. Others buy earlier, before IV has risen fully, and sell before the event, trading the IV rise rather than the outcome.
- Directional traders sometimes use spreads (buying one option and selling another) so that the IV crush on the sold leg offsets part of the crush on the bought leg.
None of these is a reliable way to make money. Each simply chooses which risk to carry.
Common mistakes
- Being right on direction and still losing. This is the IV crush. Check the expected move before buying.
- Selling event premium with no stop or hedge. The crush happens most of the time, but the exceptions are large.
- Assuming IV always drops to the old level. If the event changes the outlook (a profit warning, a policy surprise), IV can stay high.
- Forgetting the time of the event. Results announced during market hours crush IV during the session; results after the close crush it at the next open, with an overnight gap in between.