Earnings, Expected Moves and IV Crush

An earnings announcement concentrates uncertainty into a short interval. Options expiring after it can carry substantial event premium. Once results are known, that uncertainty may fall sharply, reducing implied volatility even when the stock moves. This repricing is often called IV crush.

An expected move is an estimate

A simple annualized-IV approximation uses S × σ × √T, with T in years. At a $100 stock price, 40% IV and seven calendar days, the scale is about $100 × 0.40 × √(7/365) = $5.54. This diffusion approximation spreads uncertainty over time; an earnings jump violates that simple picture.

Another common reference is the cost of an at-the-money straddle. If the $100 call costs $3.20 and put costs $2.80, the combined $6 premium sets expiration breakevens of $94 and $106 before costs. Those breakevens are payoff arithmetic. They are not automatically a 68% confidence interval or the same quantity as the model’s one-standard-deviation scale.

Direction alone does not decide the result

A 4% rise is a meaningful stock move but insufficient for this straddle at expiration. Before expiration, remaining time value and the exit spread also matter. The OIC event-volatility explanation describes why the option can fall after news despite a favorable underlying move.

Compare both sides of the event

For long premium, test a large move, a smaller move and a flat outcome with lower post-event IV. For short premium, stress an outsized gap and worse liquidity. A likely IV drop does not cap a short call’s upside risk or a short put’s downside loss. Defined-risk spreads limit compatible expiration payoffs but still have assignment and execution considerations.

Use the right expiry and price

Verify the company’s announcement time and whether it falls before the series stops trading. Compare maturities on either side of the event, and record whether quotes are current. Do not infer an earnings-only probability from a maturity that also contains several weeks of ordinary trading risk.

Plan whether to close before the announcement, after it or at a later date. Each is a different trade. A backtest should use the announcement schedule known at entry and executable option prices, including adverse gaps. No fixed number of days before earnings is a universally profitable entry rule.