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Volatility2 minute read
What is implied volatility crush?
Understand why implied volatility often falls after earnings and how that can change an option premium
Prepared by Mark · Primary sources below
Direct answer
Implied volatility crush is a rapid drop in the volatility embedded in option prices after a known event, such as earnings, removes uncertainty. Because higher implied volatility generally supports higher premiums, the drop can reduce an option's value even when the stock moves in the holder's preferred direction
Why volatility rises before an event
A scheduled announcement can create a broader range of possible stock prices. Option premiums may rise as the market prices that uncertainty, which appears as higher implied volatility when a pricing model works backward from the market premium
Why it can fall immediately afterward
After the announcement, one major unknown is gone. The market can remove part of the event premium quickly, producing the sharp change commonly called volatility crush
Why the impact varies across options
Vega estimates sensitivity to a one-point change in implied volatility and changes with current inputs. Moneyness, time to expiration, and the stock move all affect the premium at the same time
Sources and further reading
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