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IV Crush vs. Volatility Skew

For educational purposes only; not investment advice.

Direct answer

Section titled “Direct answer”

IV crush and volatility skew describe different dimensions of the implied-volatility surface. IV crush is a rapid repricing lower of event-related implied volatility after uncertainty resolves, usually most visible across time and expiries. Skew is the relative IV difference across strikes or Deltas within an expiry. One is not the opposite of the other.

They can occur simultaneously. Every sampled IV can fall after earnings while downside Put IV falls less than ATM or upside Call IV; the overall level has crushed, yet downside skew has steepened. A position can therefore have exposure to the level, term structure, and shape of IV at the same time.

Two dimensions of repricing

Section titled “Two dimensions of repricing”

Before a scheduled event, an expiration that contains the event can embed additional variance. Once the result and immediate price jump are observed, that one-time component no longer belongs to the remaining horizon. Near expiries often fall more than later expiries, but unresolved risks can keep IV elevated. “Crush” is a description after repricing, not a rule that IV must fall.

Skew compares relative IV across the strike axis for one expiry. Equity surfaces commonly price downside Puts at higher IV than ATM or upside options, reflecting tail risk, leverage effects, protection demand, supply, and market structure. Skew can steepen, flatten, rotate, or kink without a uniform level change.

Measure surface changes consistently:

  • Compare the same expiry and fixed strike only when that is the intended contract exposure.
  • Compare fixed Delta or forward moneyness when spot moves materially; yesterday’s 90 strike and today’s 90 strike may occupy different economic locations.
  • Separate a parallel level move, front-versus-back term move, Put-versus-Call skew move, and wing curvature.
  • Use executable quotes and one timestamp; stale or crossed legs can manufacture a false smile.

For a small local move, Vega × ΔIV estimates one point’s level contribution. It does not capture changing Vega, skew between legs, Vanna, Vomma, spot movement, time, or Bid/Ask. Full repricing of every leg on a shocked surface is the stronger check.

All IV falls while skew steepens

Section titled “All IV falls while skew steepens”

Suppose the event expiry is sampled before and after earnings:

Surface point Before After Change
90 Put 82% 58% −24 points
ATM 70% 42% −28 points
110 Call 74% 40% −34 points

All three IVs crush. But Put-minus-ATM skew changes from 82% − 70% = 12 points to 58% − 42% = 16 points: downside skew steepens by 4 points. Meanwhile Call-minus-ATM changes from +4 to −2 points. A single “IV fell 28 points” statement misses both relative moves.

Now assume a long Call costs $6.00, with Delta 0.55 and Vega $0.10 per share per IV point. The stock rises $4, while that option’s IV falls from 70% to 42%:

Delta estimate = 0.55 × $4 = +$2.20 per share

Vega estimate = $0.10 × (−28) = −$2.80 per share

combined local estimate = −$0.60 per share, or −$60 per standard contract

Correct direction is not enough in this approximation. Actual P&L also reflects Gamma, Theta, changed Greeks, the Call wing’s relative repricing, and execution.

Surface-aware risk process

Section titled “Surface-aware risk process”
  • Snapshot spot, forward, expiry, strike, Delta, Bid/Ask, IV, Greeks, event time, and quote time for every leg.
  • Distinguish event variance from ordinary variance and identify which expiries contain each unresolved event.
  • Shock spot jointly with IV level, term structure, downside skew, upside wing, and elapsed time.
  • Test a small move with crush, expected move with crush, tail move with persistent or higher IV, and a second unresolved shock.
  • Recompute Delta locations after a spot gap; do not compare different moneyness points as if they were identical.
  • For spreads, inspect each leg’s IV change. Net Vega near zero does not remove skew or basis risk.
  • Include wider post-event Bid/Ask, lower size, fees, legging, margin changes, early assignment, and expiration handling.
  • Attribute realized P&L to spot, curvature, time, IV level, term, skew, and execution instead of labeling the residual “crush.”
  • Size from joint stress loss, not from the expected IV decline or premium collected.

Common misconceptions

Section titled “Common misconceptions”
  • “Crush means every strike drops equally.” Surface points and expiries can reprice by different amounts.
  • “If IV falls, skew must flatten.” Relative downside skew can steepen while all absolute IVs fall.
  • “Skew is the difference between Put and Call prices.” It compares implied volatilities on a specified, consistent basis.
  • “Fixed strikes always give a clean before-and-after comparison.” A spot gap changes moneyness and Delta.
  • “IV crush guarantees short-option profit.” Gap and negative-Gamma losses can exceed the volatility benefit.
  • “IV crush guarantees long-option loss.” A sufficiently large favorable move can dominate.
  • “Net Vega zero removes volatility risk.” Term and skew points can move independently.
  • “Post-event IV always falls.” A surprise, new uncertainty, or second event can sustain or increase it.
Section titled “Related topics”

Authoritative sources

Section titled “Authoritative sources”