IV Crush and Its Impact on Intraday Option Trades

One of the most deceptive pitfalls intraday option traders face—especially around events like earnings announcements, RBI policy days, or Union Budget—is the phenomenon known as Implied Volatility (IV) Crush. This occurs when the expected volatility, which had earlier pumped up the premium of options, suddenly collapses after the event, causing a sharp drop in option prices, regardless of the underlying’s move. For intraday traders who are unaware, IV crush can wipe out premium and profits in seconds, even on correct directional trades. To understand this better, consider that options are priced not only based on the stock/index movement but also based on how volatile the market expects the move to be. This expectation is called Implied Volatility. Prior to a major event, traders anticipate large swings and this demand inflates option premiums. However, once the event is over, whether the actual move meets expectations or not, the uncertainty is gone—and so is the inflated IV. This sudden drop in IV leads to a collapse in premium—a phenomenon that can severely affect option buyers. For example, suppose Bank Nifty is trading at 48,000 just before an RBI policy, and the ATM call and put are both trading at high premiums due to spiked IV. You might correctly predict the direction—say Bank Nifty moves up to 48,300—but still, your call option barely increases or even loses value. That’s IV Crush at work: the drop in implied volatility offsets the gains from price movement. On the other hand, option sellers benefit immensely from IV crush. Selling options just before or during an event, if done with proper risk management and hedging, can allow them to collect inflated premiums that quickly erode post-announcement. The key is understanding timing, positioning, and protecting against sudden spikes. Many experienced intraday traders employ straddles or strangles before events and then square them off once the IV collapses.