Options Income
Earnings IV Crush Play
Selling a straddle right before earnings collects a price inflated by the market's uncertainty about the report, then aims to buy it back cheaper once that uncertainty resolves and implied volatility collapses.
Inflate the IV, release the earnings, find the crossover
Drag the days-to-earnings slider down toward zero and watch the IV gauge inflate and the straddle value climb with it, that's the premium a seller would be collecting. Click "Earnings released" to lock in that premium as the credit and trigger the event: IV instantly deflates to its post-earnings baseline. Then drag the actual-move slider to see how a real price swing, working against the deflated straddle, can still turn the trade into a loss.
How it works
- Implied volatility inflates as earnings approach. The market prices in uncertainty about the report, pushing IV, and the straddle's value with it, higher the closer the date gets, even though there's less time left on the contracts.
- Selling before the release locks in that inflated price as the credit. The credit received is fixed the moment the trade is placed, it doesn't change no matter what happens to price or IV afterward.
- IV crushes the instant the report is out, predictably. Once the uncertainty resolves, implied volatility drops back to a normal baseline almost immediately, which is exactly the mechanic this trade is designed to capture.
- But the P&L depends on both effects together, not IV alone. The straddle's post-earnings value is the actual move (intrinsic value) plus whatever extrinsic value the now-lower IV still supports. If the real move is small, the crushed IV wins and the seller profits. If the real move is large enough, the intrinsic value alone can exceed the credit collected, and the seller loses even though the IV crush happened exactly as expected.
Where this breaks
Being right about the crush doesn't protect against being wrong about the size
The specific risk in this trade isn't that IV fails to crush, it almost always does. The risk is that the market moves further than the inflated premium priced in. Drag the actual-move slider past the crossover point shown above and watch the P&L flip negative even with IV behaving exactly as planned. A short straddle into earnings is a bet that the move stays inside a range implied by the premium collected, not a bet on IV direction alone, and a single surprising earnings report can move a stock enough to blow through that range in one session.