Earnings Trades

Earnings season is the Super Bowl for options traders. Implied volatility spikes, premiums get fat, and stocks make big moves overnight. But earnings trades are also where most beginners lose the most money. Let us break down how to trade them intelligently.

The Earnings Volatility Cycle

Every earnings cycle follows the same pattern:

2-3 weeks before: IV starts rising as traders buy options for protection or speculation.
Day before earnings: IV peaks. Option premiums are at their most expensive.
After the announcement: IV crashes. This is called "IV crush." Even if the stock moves, options can lose value because IV contracts so sharply.

Understanding this cycle is the foundation of every earnings trade.

The Expected Move

Your broker's option chain shows the "expected move" for earnings. This is calculated from the at-the-money straddle price.

Example: NFLX at $600, reporting tonight. The weekly straddle (call + put) costs $45.00. The expected move is roughly $45 (or about 7.5%).

This means the market is pricing in a move between $555 and $645. If NFLX moves less than $45, option sellers win. If it moves more than $45, option buyers win.

Historically, about 70% of the time, the actual move is smaller than the expected move. The market tends to overprice earnings volatility. This is why selling premium around earnings can be profitable — but the 30% of the time it underprice the move can produce massive losses.

Strategy 1: Selling Iron Condors Into Earnings

The most popular premium-selling earnings trade. You sell an iron condor that expires the week of earnings.

Setup on NFLX at $600, expected move $45:

Sell $560/$555 put spread (below the expected move)
Sell $640/$645 call spread (above the expected move)
Collect about $1.50 total credit

If NFLX stays between $555 and $645, you keep the $1.50. The expected move says $555 to $645, and you placed your short strikes right at those levels. Probability is on your side.

Risk: If NFLX gaps to $500 (like it has done before), you lose $3.50 per spread. One big miss wipes out two or three winners. Size accordingly — never more than 1% of your account on a single earnings iron condor.

Strategy 2: Selling Put Spreads After Earnings (Bullish)

If you are bullish on a company's results, sell a put spread that benefits from both the stock holding up and IV crush.

Example: AAPL reports after the close. You think results will be solid. After the bell, AAPL beats estimates and gaps up to $195.

At the next day's open, IV has crashed from 45% to 25%. You sell the $185/$180 put spread expiring in 7 days for $0.80 credit. The stock is $10 above your short strike and IV just collapsed. Time and volatility are both working for you.

Strategy 3: Buying Premium Before Earnings

The opposite approach: buy options before IV ramps and sell them right before earnings.

Setup: Buy a straddle or strangle on MSFT 3 weeks before earnings when IV is at its baseline. Hold it as IV ramps up over the next 2 weeks. Sell the day before earnings.

You are not betting on the earnings outcome — you are betting on IV expansion. If MSFT's IV goes from 22% to 35% before earnings, your options gain value from the vega alone, regardless of stock movement.

Key: You must sell before the announcement. If you hold through earnings, IV crush destroys the position.

Strategy 4: The Earnings Butterfly

If you have a specific price target after earnings, the butterfly is a capital-efficient way to play it.

Example: GOOGL at $160, you think earnings push it to $170.

Buy 1x $165 call for $4.00
Sell 2x $170 calls for $2.50 each ($5.00 total)
Buy 1x $175 call for $1.50

Net debit: $0.50 ($50 per butterfly)

Max profit at $170: $4.50 ($450). That is a 9:1 payout if GOOGL pins at $170. Even landing between $165.50 and $174.50 produces some profit.

Butterflies are cheap, defined risk, and highly leveraged for a specific outcome. They are a smart way to express a precise earnings view.

Earnings Trade Rules

Size small. Earnings are binary events. Outcomes are unpredictable. Never risk more than 1% of your account on a single earnings trade.
Know the expected move. If the market expects a $10 move, do not sell options $8 away. Give yourself at least the full expected move as a buffer.
Check historical moves. Look at the last 8 quarters of actual vs. expected moves. If the stock has exceeded the expected move 5 out of 8 times, selling premium is risky.
Close before earnings if you are a buyer. IV crush is real. Unless you are specifically betting on a post-earnings move, close your long options before the announcement.
Have a next-day plan. If you sell options through earnings, know your exit plan at the open. Do not wait to see what happens. Set your rules before the stock moves.

Earnings trades are exciting but dangerous. Treat them as a specialized skill set, not your bread and butter. Speaking of volatility, let us look at how to measure it with IV rank and IV percentile next.