IV Crush

The intuition

An event with a known date is a known quantity of uncertainty. Traders can see it coming, so in the days before it they bid up the options that would pay if it produces a big move. That demand lifts implied volatility across the chain, most on the expiry that contains the event. The event itself then resolves the uncertainty. Whether the outcome is dramatic or dull, there is nothing left to wait for, and the extra volatility that was being paid for disappears in minutes.

The buyer who bought the day before was paying for the possibility of a large move. After the event, the move, whatever it was, is a fact, and the possibility is worth nothing. That is why a correct directional bet can still lose: the gain from direction has to outrun the loss from the vanished possibility.

Formula

Premium change from the crush ≈ vega × (IV after − IV before)

Break-even move for a long straddle through the event ≈ the straddle's premium before the event, as a fraction of spot

The implied move the market is pricing can be read from the at-the-money straddle: a ₹480 straddle on Nifty at 24,000 says the market expects a move of roughly 2% either way.

Worked example (illustrative numbers)

Suppose NIFTY is at 24,000 and an RBI policy announcement is due at 10:00 tomorrow, with ten days to the monthly expiry. Over the previous week, at-the-money implied volatility has climbed from 13% to 18%. The 24,000 straddle (call plus put) costs about ₹570 with a combined vega of roughly 32 per unit; one lot of 65 units is ₹37,050.

• Outcome A, a surprise cut: Nifty jumps 350 points to 24,350 by noon and IV drops to 13%. Intrinsic value of the straddle is now 350; the crush removes about 32 × 5 = ₹160 of volatility value. The straddle is worth about ₹510. The buyer was right that the market would move, saw a 1.5% move, and is down about ₹3,950 per lot.
• Outcome B, no change, as expected: Nifty drifts 80 points and IV drops to 13%. The straddle is worth about ₹400. The buyer is down about ₹11,000 per lot.
• Outcome C, a shock: Nifty falls 700 points. Even with the crush, the straddle is worth about ₹700: the buyer is up about ₹8,300 per lot. This is the outcome the premium was pricing, and it is the rarest. (Model values at the stated volatilities; a live chain will differ.)

The writer of the straddle took the mirror of each outcome: a profit in A and B, a loss in C. Writing event volatility pays most of the time and occasionally pays back everything at once, which is the shape of every short-volatility trade.

Why it matters to an options trader

• It is the main reason event trades disappoint. Direction is only one of three things a long option needs around an event; the crush and the deadline are the other two.
• It is a tradable edge for writers. Selling elevated volatility into an event and buying it back after is a standard professional trade, with the shock outcome as its known risk.
• It is visible in advance. A front expiry trading several volatility points above the next one (an inverted term structure) is the event premium in plain sight; the implied move can be read from the straddle.
• It shapes structure choice. Spreads and calendars reduce vega exposure; buying the expiry after the event instead of the one containing it avoids most of the crush while keeping the directional view.

Common mistakes

• Buying options the day before an event. That is the moment implied volatility peaks; the crush is a near-certainty regardless of outcome.
• Judging the trade by the index move alone. The question is whether the move beat the implied move the straddle was pricing.
• Writing event volatility with no plan for the shock outcome. The one time in several that the move exceeds the premium can cost more than all the other times earned.
• Forgetting stock results. A stock's options can carry an event premium of many volatility points into results; the crush the next morning is often larger than on the index.
• Mistaking a crush for a change in trend. IV falling after an event says the event is over, not that the market has become safe.

Indian-market specifics

• Nifty's weekly Tuesday expiry means a scheduled event almost always falls inside a specific weekly, which carries the whole event premium while the next weekly trades close to normal; the gap between them is the cleanest measure of the crush to come.
• Recurring Nifty events: the Union Budget, RBI policy days, election results, large index rebalances, and US Fed and CPI nights that land before an NSE open.
• India VIX rises into these events and falls after them; the monthly options it is built from see a smaller crush than the weekly that contains the event.
• Lot sizes after the January 2026 revision (Nifty 65, Bank Nifty 30, FinNifty 60, Sensex 20) convert the per-unit vega loss into rupees per lot.

FAQ

What causes IV crush?

The resolution of a known uncertainty: the event premium in option prices is withdrawn once the event has happened.

How much can IV crush cost?

Vega times the fall in IV; on an at-the-money Nifty straddle, a five-point crush is roughly ₹160 per unit.

Can a long option still profit through IV crush?

Yes, if the index moves further than the premium paid; that is the rarer outcome.

Which events cause IV crush on Nifty?

Budget, RBI policy, election results, index rebalances and overnight US data; results for individual stocks.

Related terms

• Implied Volatility (IV)
• Vega, the size of the crush per option
• Volatility Term Structure, where the event premium shows up first
• IV crush around events, the longer guide