How Can I Spot a Volatility Crush Before It Happens?

It's one of the most frustrating experiences in options trading: you spend ages analyzing a stock, you predict its direction perfectly after an earnings report, but you check your account... and you've still lost money.

How can I spot a volatility crush before it happens?

That painful, counter-intuitive loss is caused by the "Volatility Crush" (or IV Crush). In this deep dive, we flip that frustration into a strategic edge. We'll explain what a volatility crush is—that rapid, steep drop in an option's price aftera big, known event (like earnings, an FDA decision, or an FOMC meeting) is resolved.

We provide a 6-tool checklist to help you see the crush coming before it happens. You'll learn how to check IV Rank (IVR), why you must compare the market's implied move vs. the stock's historical move, and how to use the volatility term structure to spot over-inflated premiums. This episode will show you why buying options before these events is often a low-probability bet and how you can use this predictable pattern as a trading opportunity.

After listening, how will you change your approach to trading around earnings?

Key Takeaways

• What is a Volatility Crush? It's the rapid, predictable drop in implied volatility (IV) and option prices after a known catalyst (like earnings) occurs. The uncertainty is resolved, demand for "insurance" evaporates, and the option's value gets "crushed."
• Spot the Overpricing (Implied vs. Historical): The #1 way to spot a crush is to compare the implied move(what the options market is pricing in) with the stock's historical move (what it actually does, on average). A big gap signals options are overpriced and vulnerable.
• Check IV Rank (IVR): Always check the IVR or IV Percentile. A high IVR (e.g., > 70%) signals that options are historically expensive for that stock, making a post-event crush highly likely.
• Buying Options is a Low-Probability Bet: Buying calls or puts right before a high-IV event is a losing game. You must be right on direction and the stock must move more than the already-huge move the market has priced in.
• The Opportunity (Sell Defined-Risk Premium): The crush is a predictable pattern. Option sellers can profit from this by selling expensive premium (using defined-risk strategies like credit spreads or iron condors) and benefiting as the volatility collapses.

"You predict the direction perfectly, stock moves just like you thought. But then you check your P, L, and somehow you still lost money. It just feels fundamentally wrong, doesn't it?"

Timestamped Summary

• (00:46) What is a Volatility Crush (VC)?
• (02:49) The Main Triggers: Earnings, FDA Decisions, FOMC meetings.
• (03:55) The "Losing While Winning" Example: Why your correct directional bet still lost money.
• (04:42) A 6-Tool Toolkit to Spot the Crush (IVR, Calendars, Implied vs. Historical Move, etc.)
• (07:02) How to Calculate the "Implied Move" vs. the "Historical Move."
• (12:31) Strategies: How to trade the volatility crush (Avoid buying, sell defined-risk premium).

If this episode helped you understand volatility, please leave us a 5-star review on Apple Podcasts! Know a trader who's frustrated with earnings? Share this episode with them!

Support the show