This guide explains why IV crush happens, how it affects buyers and sellers with worked numbers, how to trade around events, and how to build rules that account for it.
Why implied volatility rises before events
Implied volatility is the level of volatility built into option prices. Before a known event, the market does not know which way the news will go, but it knows the move could be large. Option sellers demand more premium to take that risk, and buyers pay it. IV rises, and with it, the price of every option.
India VIX, which measures the volatility implied by Nifty option prices over the next 30 days, often rises before major events and falls after them.
Why IV falls after the event
Once the event happens, the uncertainty is resolved. Even if the market moves, the expected size of future moves drops back to normal. IV falls, and option prices fall with it. This is IV crush.
A worked example
These figures use Black–Scholes model prices on Nifty with a lot of 65.
Before the event: Nifty is at 25,000, 3 days to expiry, and IV is 20% because of the event. The ATM 25,000 straddle costs ₹361.74 per unit, or ₹23,513 per lot. At 20% IV, the market is pricing a one-day move of about 262 points.
After the event: one day later, with 2 days left, IV has fallen to 13%. Here is what happens to a buyer of that straddle, depending on how far Nifty moved:
| Nifty move after the event | Long straddle P&L per lot |
|---|---|
| No move | −₹11,030 |
| 150 points | −₹8,381 |
| 300 points | −₹1,929 |
| 450 points | +₹6,673 |
Even a 300-point move, larger than the 262-point move the market had priced, still loses money, because the fall in IV took so much value out of both options. If IV had stayed at 20%, the same 300-point move would have made about ₹2,084.
For a single option: an ATM call bought at ₹187.54 before the event is worth about ₹234.75 after a 200-point rally with IV down to 13%. The buyer was right about direction and the index moved well, but the option gained only about 25%.
Who gains and who loses
| Effect of IV crush | |
|---|---|
| Option buyers | Lose: the premium falls even if the market moves |
| Option sellers | Gain: the options they sold get cheaper |
| Long straddles and strangles | Lose the most, since they own two options |
| Short straddles and strangles | Gain the most, if the move is not too large |
| Spreads | Affected less, because the bought and sold options partly offset |
Ways to trade around events
Sell before the event
Selling a straddle or strangle before the event collects inflated premium and benefits from the crush. It also carries the full risk of the event: a large surprise can move the market far beyond the breakevens. Hedged versions, such as an iron fly or iron condor, cap that loss.
Sell after the event
Some sellers wait until the news is out, then sell once the market has absorbed it. Premium is lower, but the event risk has passed.
Buy with spreads instead of single options
If you expect a large move, a debit spread loses less to IV crush than a single option, because the option you sell also loses value.
Buy only when IV is low
If you want to own options into an event, buy them before IV has risen, well ahead of the event, and accept the time decay while you wait.
Rules that account for IV crush
- Check IV before entering. Compare current IV with its recent range using the implied volatility calculator.
- Know the event calendar. Mark RBI policy dates, the Union Budget, election results and major company results.
- For buyers: avoid single long options when IV is in the top part of its range ahead of an event; prefer spreads.
- For sellers: decide whether to hold through events, size for the worst plausible move, and prefer hedged structures.
- Exit plan: set time and price exits for the session after the event.
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Common mistakes
- Buying options the day before results and being surprised when they fall after a good move.
- Assuming the move will cover the premium. The market prices a move; you need a bigger one after the crush.
- Selling naked options into events without sizing for a surprise.
- Ignoring vega. Check how much the position gains or loses per point of IV. See the options Greeks.
Frequently asked questions
What is IV crush in options?
A sharp fall in implied volatility after an event, which lowers option prices even if the underlying moves.
When does IV crush happen?
Usually just after scheduled events such as results, policy announcements, budgets and election results.
Can I make money from IV crush?
Option sellers can benefit, but they take the risk of a large surprise move. Hedged selling strategies limit that risk.
How do I avoid IV crush as a buyer?
Buy before IV rises, use spreads instead of single options, or wait until after the event.
Does India VIX show IV crush?
India VIX reflects the general level of Nifty implied volatility, and it often falls after major events. Individual options can see larger changes.
Sources
- NSE: India VIX
- Black, F. and Scholes, M. (1973). The Pricing of Options and Corporate Liabilities. Journal of Political Economy, 81(3), 637–654
- Natenberg, S. (2014). Option Volatility and Pricing. McGraw-Hill