Unit 12 of 15 · Advanced

Event volatility and the IV crush

In one read

Implied volatility is the market's price for future uncertainty, and scheduled events concentrate that uncertainty into a moment. Before an earnings report, an FOMC decision, or a CPI print, IV rises: nobody knows the outcome, so the market pays more for options and their extrinsic value inflates. When the number lands, the uncertainty resolves almost at once — and IV collapses just as fast. That drop is the IV crush. Its consequence is the trap that catches new options buyers: you can be exactly right about direction and still lose, because the vega you paid for evaporates the moment the event passes. This unit separates the two things a price move does to an option — the directional part through delta and the volatility part through vega — and shows, on a generic event session, why an option can be worth less after a big move than it was before, once the crush takes the extrinsic value out.

Why IV rises into an event and falls after

Implied volatility (IV) is the market's price for how much the underlying might move — its forward estimate of uncertainty, read out of option prices. Scheduled events package a large, known chunk of uncertainty into a single moment: an earnings report, an FOMC rate decision, a CPI print.

Ahead of the event, IV rises. The outcome is unknown and only hours or days away, so the market is willing to pay more for optionality, and that willingness shows up as inflated extrinsic value — the part of an option's price that is not intrinsic. Options simply cost more going in.

The instant the number is released, the uncertainty resolves. The event that justified the elevated IV is over, so IV falls — often sharply and within minutes. That collapse is the IV crush, and it drains the extrinsic value that the pre-event IV had pumped up.

A worked example

Take a generic instrument — call it GENCO — reporting earnings after the close, trading near 100. In the days before, IV on the 100-strike options climbs, and their prices climb with it: the market is charging more for the coming unknown. Say the 100 call trades for 5.00, almost all of it extrinsic.

The report lands and GENCO gaps up to 103. Direction was "right" — the stock rose. But two forces act on the option at once:

  • Delta rewards the move: three points in your favour lifts the call's intrinsic value from 0 to about 3.
  • Vega works against you: with earnings past, IV crushes, and the extrinsic value that made up most of that 5.00 collapses toward what a post-event option is worth.

Net the two and the call can be worth less than the 5.00 it cost — the intrinsic value gained is smaller than the extrinsic value lost. That is the mechanism behind "right on direction, wrong on the trade": an event move has a delta part and a vega part, and near an event the vega part can dominate.

This describes the shape of event pricing, not what to do about it — the point is that IV, not just direction, is a live variable in an option's price.

See it in kestrel

Read how price and volatility interact off a real, recorded event session:

npx kestrel.markets sim chip-earnings-blowout

That runs a deterministic simulation over a generic post-earnings session — managed licensed data, no wall time, no signup, no card — and prints a certified proof URL. Point the CLI back at any proof and it recomputes the whole record on your own machine, byte for byte:

npx kestrel.markets certify https://kestrel.markets/proof/art_d29415f0cf502f4a218a9cba

Keep the tool one command away: drop the kestrel.markets MCP server into your client and the next event session you want to read is already wired up — no account in between.

Recompute it

Every claim in this unit recomputes from a certified proof — no account, no card.

/proof/art_d29415f0cf502f4a218a9cba
Keep readingThe mechanics of selling premium

Agent twin: /education/options/opt-event-vol/content.md