After the event, even if you correctly predicted the market direction, the option you bought could still lose money. The main reason is simple: you bought when implied volatility (IV) was high, and as soon as the event ends, IV collapses instantly (a "vol crush"). This drop can wipe out any profit you made from guessing the direction right.
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Before an event, the market is full of uncertainty. This drives up the option's implied volatility, making option prices expensive. After the event, the uncertainty vanishes and the market calms down. IV drops sharply, squeezing the "bubble" out of option prices.
Step 1: Check If You're Facing Vol Crush Risk
Check if your trade is approaching a high-risk event. Look at the calendar for major macroeconomic data releases (such as CPI, FOMC meetings) or big industry events. At the same time, compare current implied volatility (IV) with its own historical levels using IV Rank or IV Percentile tools. If IV is at a historical high (for example, above 70%), it means option prices already include a high "event premium." Buying options at this point faces a huge vol crush risk. This confirms you are trading around a specific event (like an earnings report or data release) and IV is near its upper historical range.
Step 2: Understand How Vol Crush Hits Your Profits
Learn why you can be right on direction but still lose money. Remember a formula: Option price change ≈ Delta contribution (profit when direction is right) + Vega contribution (loss when IV drops). Before the event, Vega's absolute value is huge, enough to outweigh Delta's contribution. Taking NVIDIA (NVDA) as an example, after earnings implied volatility typically drops 10 to 16 points. A naked short straddle loses on average 69%, which conversely means buying a short-term straddle before earnings yields an average 69% gain. Likewise, traders have shared cases where they bought out-of-the-money call options before earnings; the stock price did rise, but IV collapsed causing the option price to drop, leading to a loss. You now understand that around events, Vega losses are the main driver and can even wipe out your directional gains.
Common Reasons for Failure
Many beginners see "cheap" out-of-the-money options before an event and think the risk is small, expecting a big payout if they guess right. But in reality, these options have over a 95% chance of expiring worthless. More importantly, even if the price moves as expected after the event, the high IV cost of entry and the subsequent IV crush will greatly reduce or erase your profit, making you "right on the direction, but losing money."
Risk Warning
When it comes to trading strategies, a rapid IV contraction after an event is certain, but that doesn't mean you can easily make money by "selling options." A simple backtest shows that selling a naked straddle before an event usually leads to losses far exceeding the gains from IV crush, because you have to bear huge Gamma risk (losses from directional moves). This means trying to profit from vol crush as a seller is extremely risky and requires very careful money management and hedging.
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Next Steps
If you plan to buy options before a major event, your first priority is to calculate the breakeven point. The simplest estimate is: expected price move = the combined premium of at-the-money straddle. If the market expects a maximum price move of 5%, but you think the actual move could exceed 10%, then buying offers a mathematical edge. After the event, if IV has already dropped significantly and the strong directional move you expected hasn't happened yet, consider closing the position regardless of profit or loss.
