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What IV means, why the premium swells before an event, and what IV crush is
Published by The Retail Trader · AUG 09, 2026 · Features
Two options at the same strike, with the same expiry, but one's premium is double the other's. Why? Because premium is not only about distance, it is also about expectation — and the name of that expectation is implied volatility.
IV is the market's expectation of how much movement there will be ahead. It is not past movement — that is historical volatility. IV is what is worked backwards from today's premium: if people are paying this much premium, how big a move are they expecting.
So do not take IV as a forecast. It is not a prediction, it is a price. And like every price, it can be wrong.
In a calm market an ATM option looks cheap because no one expects a big move. In a falling market the same strike becomes many times costlier, because everyone wants to buy insurance.
This is why put options are very expensive on days of panic. You are not just buying protection — you are buying at the time when everyone is buying.
Before any big event — a result, the budget, a policy — IV rises. After the event the uncertainty is gone and IV drops immediately. This drop is called IV crush.
The result is what many people have suffered: the news came in your favour, the stock went up, and your call option still became cheaper — because all the fear dissolved in the premium vanished as soon as the news came.
The practical way, without any formula:
• Compare an underlying's IV with its own history — whether today's IV is above or below its normal range.
• High IV means option sellers receive more and buyers have to pay more. This is not a direction signal, it is a price signal.
• One or two days before a big event IV is almost always elevated. At that time the break-even of option buying moves very far away.
• Different strikes have different IV. Far strikes often have higher IV, because crash insurance is sold there.
In one line: before thinking about direction, ask whether you are buying at a cheap rate or an expensive one.
This article is for educational purposes only — it is not a buy or sell recommendation, makes no claim of guaranteed returns, and is not advisory. Rules, rates and mechanics are changed by the exchange, SEBI and RBI from time to time, so verify every number yourself with your broker or an official source.