Earnings and the IV crush
An option can lose money even when the stock moves the right way. Around earnings it happens all the time: implied volatility climbs into the report, then falls back the morning after, and the options lose the value it held. That fall is the IV crush.
Why IV climbs before a report
An earnings report can move a stock more in one session than it moves in weeks. Every expiry after the report date includes that session, so its implied volatility carries the extra move on top of the stock's ordinary day-to-day volatility. The nearer the report, the larger its share of the expiry's remaining time, and the higher the front expiry's IV climbs. Expiries before the report do not include it and stay at ordinary levels, so the term structure shows a kink at the first expiry after the date.
The crush
Once the report is out, the uncertainty it carried is gone. The next morning the front expiry's IV falls back toward the stock's usual level, often by a third or more in a single session. Every option on the stock loses the vega that IV held, the at-the-money ones most. An option bought for the event pays only if the stock moves more than was priced in; a move smaller than that leaves its buyer behind even in the right direction.
The move priced in
The size of the move the market expects for the report is read from the options, as the expected move of the first expiry after it. The quickest estimate is the price of that expiry's at-the-money straddle, the call and the put together, as a share of the stock price. Strictly it holds the ordinary days to expiry as well as the report, so for an expiry a few days out it slightly overstates the report's own move.
priced move ≈ ATM straddle of the first expiry after the report ÷ stock price
Against the past reports
The useful question is not how big the priced move is, but how big it is against the stock's own record. Measure each past report's actual move from the last close before the news to the first close after it: a report before the open runs from the session before to the report day, one after the close from the report day to the session after. Then compare:
- Priced move well above the past average: the report is priced rich. Sellers of premium into earnings are being paid more than the stock has usually needed.
- Priced move well below it: the report is priced cheap, and buying the straddle has more often paid.
A few reports are a small sample, and a single huge move dominates an average, so read the moves one by one as well as their mean.
Trading around it
- Selling premium into a report (short straddles, strangles, iron condors) bets the actual move falls short of the priced one. It wins often and loses big on the reports that surprise; defined-risk structures cap the loss.
- Buying premium bets on a move larger than priced. It needs the stock to beat the straddle, not just to move.
- Calendars sell the inflated front expiry and buy a later one, trading the kink in the term structure rather than the move.
In Options Meerkat
The dashboard's earn column shows the days to each symbol's next report. On a symbol's detail page, the earnings view (E) lists its past reports' actual moves beside the move priced into the next one, and the term structure (e) shows the forward volatility jumping over the report date. The opportunity scan (O on the list) flags reports within three weeks whose priced move is at least 1.25 times the stock's mean move at its past reports (earnings rich), or at most 0.8 times (earnings cheap), once there are at least three past reports to compare.