What is IV Crush? A Simple Guide for Indian Traders

IV crush is a sharp drop in implied volatility, usually right after a major event like results or a policy announcement. As IV collapses, option premiums fall quickly, even if the underlying moves in the buyer's favour. It is a key risk for event-driven option buyers.

Many new traders buy options before a big event, pick the right direction, and still lose money. The reason is almost always IV crush.

Understanding IV crush can save you from a common and painful mistake. Read on for a simple breakdown built for beginners. You can track volatility on Stockk.

Key Takeaways

• IV crush is a sharp fall in implied volatility after an event.
• It deflates option premiums quickly.
• You can lose even with the right direction.
• It hurts buyers and often helps sellers.
• Avoid buying options into inflated pre-event IV.

Why does IV crush happen?

Before a known event, uncertainty pushes implied volatility and premiums higher. Once the event passes and the outcome is known, that uncertainty disappears and IV falls sharply. The drop deflates premiums through negative vega, often overwhelming any gain from the spot move. In other words, you were paying extra for the uncertainty, and once it is gone, that extra value vanishes.

A clear example of IV crush

Imagine a trader buys a call before a company's results, when IV is inflated and the option is expensive. The results come out, the stock rises modestly, but IV collapses. The premium falls despite the favourable move, because the volatility that supported it has vanished.

How do traders handle IV crush?

• Avoid buying: do not buy expensive options just before an event
• Consider selling: sellers can benefit as premiums deflate after the event
• Use spreads: spreads reduce the impact of an IV crush on one leg

Why sellers like the crush

Option sellers often position to benefit from IV crush. They sell rich, expensive premium before the event and watch it deflate afterward, keeping the difference. This is the mirror image of the buyer's trap, and it is why experienced traders are often sellers, not buyers, around events.

If you want to act on futures and options, you can do it through Stockk. Setting up a demat account takes only a few minutes, and Indira Securities handles the backend. Browse the Knowledge Center to keep learning.

Futures and Options are leveraged products and carry a high risk of loss that can be more than the money you put in. This article is only for learning and is not a recommendation to trade in derivatives.

Frequently Asked Questions