# Volatility crush

**ADV-23 · Advanced Options · Core**

**Lesson question:** How can a favorable stock move lose option value?

Original fictional examples; educational writing, not live market data, orders or production approval.

## By the end

- Explain the mechanism in the lesson question.
- Reproduce the worked comparison and recognize its failure case.

**Prerequisites:** OPT-F01, OPT-F02, OPT-F03, OPT-F04

An event can remove uncertainty priced into options. Afterward IV may decline, although the amount and surface response are not guaranteed. A trader can be right about direction while paying too much for the magnitude and uncertainty.

Separate intrinsic progress from volatility and time repricing.

## Understand the mechanism

Vega estimates a small IV effect while Gamma and Theta change the other exposures. A large event move can exceed the accuracy of a fixed-Greek approximation. Full-model repricing still depends on exercise and surface assumptions.

A short-volatility position benefits from the IV component only if adverse movement and execution do not dominate.

## Walk through the process

State a directional forecast and a separate volatility forecast. Reprice both jointly and inspect a disappointing move, unchanged price and adverse gap. Do not call high pre-event IV automatically rich.

For a calendar, the two expiries may reprice differently after the event.

## Model and implementation boundary

These are complete fictional reading examples, not live opportunities. Terminal identities assume the stated common settlement. Multi-expiry values require a surviving-leg model. Costs, assignment and financing can alter realized outcomes; a mathematical bound alone does not guarantee the same operational loss path.

## A worked example

A fictional European call at S=K=100, seven days, IV 60%, r3% and zero yield costs 3.341782. After one day, spot103 with unchanged IV 60% gives 4.872577.

At the same new spot and time but IV 25%, value is 3.354018. Relative to entry the change is +0.012236 per unit. The graph isolates these model states; neither the IV decline nor the stock path is live or guaranteed.

## Graph: Volatility crush—worked comparison

**Horizontal:** Model state: entry / higher spot / IV reset  
**Vertical:** Call model value per unit (USD)

Fictional data from the written example. The chart organizes the comparison; its shape is not a forecast.

Complete numerical data are embedded in `scripts/advanced-options/ADV-23.js` and displayed as an accessible table in the HTML lesson.

## What would invalidate the reading?

The trader checks only directional success and ignores the IV paid. A seller checks only the crush and ignores a jump beyond the collected premium.

## Check your understanding

### What must be held fixed to isolate IV's contribution between the two post-event states?

**Answer:** The new spot, remaining time, rate and dividend assumptions.

**Why:** Only IV differs in that comparison.

### What is the critical failure to avoid?

**Answer:** The trader checks only directional success and ignores the IV paid. A seller checks only the crush and ignores a jump beyond the collected premium.

**Why:** Explain this risk before treating the example as a decision rule. A correct calculation does not guarantee a favorable market outcome. **Critical risk check.**

## Takeaway

Return to the question: How can a favorable stock move lose option value? State the observed facts, the assumptions and the failure condition separately.

## References and provenance

The cited references support definitions and conventions. The teaching prose, tickets and numerical scenarios are original; they are not attributed as historical market observations.

- [OIC Strategy Reference](https://www.optionseducation.org/strategies/all-strategies-en)

- [OCC Options Disclosure Document](https://www.theocc.com/company-information/documents-and-archives/options-disclosure-document)

- [OIC Greeks](https://www.optionseducation.org/advancedconcepts/understanding-options-greeks)