Trading Around Earnings
Earnings announcements are volatility events — learn how to trade them with options using IV expansion and crush mechanics.
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Earnings Are Volatility Events
Four times a year, every public company reports earnings. In the days leading up to the announcement, implied volatility on that stock's options surges — sometimes doubling or tripling. The day after earnings, IV collapses. This expansion and contraction cycle is one of the most reliable and tradeable patterns in the options market.
You do not need to predict whether the company will beat or miss earnings. You need to understand the volatility dynamics.
The Earnings IV Cycle
2-3 weeks before earnings: IV starts climbing as traders buy options for protection or speculation. The front-month options absorb most of this increase.
Day before earnings: IV peaks. Option prices are at their most expensive. A stock with normal IV of 30% might see front-month IV hit 60-80%.
Morning after earnings: IV crushes. The uncertainty is resolved. IV drops back toward its normal range in a matter of hours. This drop can be 30-50% of the pre-earnings IV level.
Example — NFLX earnings:
- Two weeks before: IV at 35%
- Day before earnings: IV at 65%
- Morning after earnings: IV drops to 32%
- That 65% to 32% drop is the volatility crush
If you sold options before earnings, the crush works in your favor — even if the stock moved significantly.
Strategy 1: Sell Premium Before Earnings
The trade: Sell an iron condor or strangle 1-3 days before earnings. Collect the inflated premium. Let the crush reduce your option prices after the announcement.
Example — AAPL earnings:
- AAPL at $180, earnings tomorrow
- Sell $170/$165 put spread and $190/$195 call spread (iron condor)
- Collect $3.20 total credit ($320 per iron condor)
- Max risk: $5.00 - $3.20 = $1.80 ($180)
If AAPL stays between $170 and $190 after earnings, you keep the full $320. But even if AAPL moves to $172 or $188, the IV crush often reduces the value of both spreads so much that you can still close for a profit.
The edge: You are selling options at their most expensive point. The crush is your ally.
The risk: AAPL moves more than expected — gaps to $160 or $200. Your spread gets blown through. This is why earnings trades require smaller position sizes than normal income trades. Risk no more than 1-2% of your account on any single earnings play.
Strategy 2: Buy Premium and Sell After IV Expansion
The trade: Buy options 2-3 weeks before earnings, when IV is still moderate. Sell them 1-2 days before earnings, after IV has expanded but before the announcement.
Example — AMD earnings in 3 weeks:
- AMD at $150, IV at 35%
- Buy 1 AMD $150 straddle for $8.00 ($800)
- Two weeks later, IV has expanded to 55%. AMD still at $150.
- Straddle now worth $11.50 ($1,150) due to IV expansion alone
- Sell for $350 profit without earnings even happening
The edge: You profit from IV expansion without taking the binary earnings risk.
The risk: The stock moves against you before earnings, or IV does not expand as expected. This works best on stocks with a reliable pre-earnings IV ramp.
Strategy 3: Post-Earnings Volatility Plays
The trade: Wait until after earnings are announced. If the stock gaps but IV is still elevated (sometimes it takes a day to fully crush), sell premium into the remaining elevated IV.
This is the safest earnings approach because the binary event has already passed. You are selling premium on known information.
How to Size Earnings Trades
Earnings trades are binary by nature — you either win or lose, with little middle ground. Size accordingly:
- Maximum 1-2% of account at risk per earnings trade
- Never have more than 3-4 earnings trades on simultaneously
- Use defined risk strategies (iron condors, credit spreads). Avoid naked options on earnings plays.
- Expect to lose 30-40% of earnings trades. Your wins need to be larger than your losses. This is the opposite of regular income trading where you win 70%+ of the time.
The Expected Move
Before every earnings announcement, calculate the expected move. This is the stock move implied by the option prices.
Quick calculation: Look at the at-the-money straddle price for the nearest expiration after earnings. That straddle price is approximately the expected move.
If AAPL's at-the-money straddle costs $8.00 with the stock at $180, the market expects AAPL to move roughly $8.00 (4.4%) in either direction after earnings.
Key insight: Historically, stocks move less than the expected move about 70% of the time. This is the earnings seller's edge — the market consistently overestimates post-earnings moves. Studies across hundreds of earnings cycles show the actual move is smaller than implied roughly two-thirds of the time.
Earnings Calendar Discipline
Build an earnings calendar at the start of each quarter. Know exactly when every stock on your watchlist reports. Set these rules:
- Close any existing income positions on a stock at least one week before its earnings
- Decide before earnings whether you will trade the event or skip it
- If trading, enter your position with a clear plan: entry, profit target, max loss
- After earnings, wait 1-2 days before opening new income positions on that stock — let IV settle
Earnings are the highest-risk, highest-reward volatility events in individual stocks. Trade them with respect, and they add a powerful tool to your volatility trading arsenal.