How Does the Concept of “Event Risk” Affect Option Pricing?

Event risk is the risk of a sudden, unpredictable, and significant price change due to a specific future event, such as a major regulatory decision or a network upgrade (like The Merge). This risk causes the implied volatility (IV) of options to spike dramatically leading up to the event.

This spike increases the option's premium, reflecting the greater uncertainty. Once the event passes, if the price movement is smaller than expected, the IV will typically "crush," leading to a drop in option price.