[Options Explained] Don't blame the fundamentals! The culprits behind last night's plunge were: the Vanna Crush and the negative Gamma death spiral

Last night before going to bed, I was feeling great. $NVIDIA(NVDA.US) reported strong earnings, $Alphabet(GOOGL.US) launched "Banana Pro," and the non-farm payroll data was decent. My account kept rising, so I went to sleep peacefully.

But when I woke up this morning, I was stunned—what the hell happened? My account just performed a "high-dive plunge." Soaring to the sky in one moment, then plummeting straight down the next!

Here are some painful numbers:

$NVIDIA(NVDA.US) beat earnings expectations but still dropped 7%.

$Invesco QQQ Trust(QQQ.US) rose as much as 2.31% intraday but closed down 2.37%.

Meanwhile, $Cboe Volatility Index(.VIX.US) had a field day—it opened down 17% (market optimism) but closed up 11% (market panic), with an intraday swing of 35%.

Note: The VIX Index is the S&P 500 Volatility Index, also known as the "fear gauge." A higher VIX means investors expect greater market volatility ahead. Typically, a sharp rise in the VIX accompanies market declines.

This kind of market action—where you're lifted to the sky only to be slammed back down—has only happened twice in history: April 7, 2020 (COVID crash) and April 8, 2025 (Trump tariff turmoil).

Why did the market drop despite good news?

Multiple factors were at play, but from a derivatives perspective, one key driver was last night's Vanna Crush and negative Gamma squeeze

What is Vanna Crush?

Vanna is a rare term. Though not among the basic Greek letters, it's a legitimate advanced Greek in options trading.

Simply put, Vanna measures how much an option's Delta changes when implied volatility (IV) shifts.

To understand better, think of it this way:

Delta = How much an option's price moves when the stock rises $1 (speed)

Gamma = How fast Delta changes when the stock rises $1 (acceleration)

Vanna = How fast Delta changes when IV rises 1% (also acceleration)

In short, Gamma tracks price impact on Delta, while Vanna tracks IV impact on Delta.

How did Vanna Crush form?

Rewind to a few days ago:

Everyone knew big events were coming—NVIDIA earnings and non-farm payrolls.

Good results could lift markets; bad ones might crash them.

Two groups emerged: institutional investors holding billions in stocks bought massive protective puts from market makers to hedge risks.

Meanwhile, optimists betting on a rally loaded up on calls.

Higher uncertainty meant sky-high IV pre-event.

Then last night:

$NVIDIA(NVDA.US) crushed earnings, $Alphabet(GOOGL.US)'s new product impressed, and payrolls were solid. Uncertainty vanished—IV collapsed.

With stocks surging, hedgers realized: "Worried for nothing!" Their puts became worthless.

Enter market makers

Market makers—who sold those options—don't bet on direction. Their only rule: Stay Delta-neutral.

Last night's simultaneous stock rally and IV plunge made calls' Vanna negative, reducing their aggregate Delta.

(Why? In-the-money calls have negative Vanna. As IV fell, their Delta rose less than expected—e.g., from 0.6 to 0.65 vs. 0.7.)

Suddenly, market makers held excess stock hedges. To rebalance, they dumped shares—triggering a mechanical selloff: Vanna Crush.

Then puts joined the party

Vanna Crush alone might've been brief. But markets entered a negative Gamma death spiral.

As the S&P 500 broke key levels (e.g., 6650, 6600), those near-worthless protective puts gained value.

Market makers—who'd sold puts and shorted stock to hedge—now faced exploding Delta risk as puts went in-the-money (e.g., Delta from -0.1 to -0.8).

To stay neutral, they sold more stock, fueling a loop:

Vanna Crush sales → Price drops → More puts in-the-money → More forced selling → Deeper drops.

That's the anatomy of last night's "freak crash." Let this be a risk-management lesson.

Now the burning question: When will this selloff end? Share your thoughts below.

P.S. Goldman notes $3.1T in options expire today. Once these puts roll off, negative Gamma pressure may ease.

Further reading: Gamma squeeze explainer

[Explainer] Meme Stock Beyond Meat Soars 1500% in 4 Days! How Retail Traders Used Gamma Squeeze to Crush Shorts!