How to Trade Options on Earnings Day

Earnings Day: The Options Trader's Super Bowl

Earnings announcements create the biggest single-day moves for individual stocks. Options traders can capitalize on these moves — but the risk is equally outsized. This guide covers what to do on earnings day itself, from pre-market preparation to post-announcement execution.

Step 1: Pre-Earnings Preparation (Before the Announcement)

Do your homework before the market opens on earnings day (or the day before, for after-hours reporters):

1. Check the expected move. Your broker's option chain shows the expected move. If the straddle is priced at $5 and the stock is at $100, the market expects a $5 (5%) move.
2. Review past earnings moves. How far has the stock moved on the last 4-8 earnings? If it has moved 8% on average but the expected move is only 5%, the market may be underpricing the move.
3. Know the report time. Before market open (BMO) or after market close (AMC). This determines when to act.
4. Check whisper numbers. The consensus estimate is public, but what do traders actually expect? Whisper numbers and options positioning can reveal the true expectation.

Step 2: Pre-Earnings Strategies

If you think the move will be bigger than expected:

• Buy a straddle or strangle before the close (for AMC reporters) or the day before (for BMO reporters)
• Use the weekly expiration that captures the earnings date
• You need the actual move to exceed the expected move to profit after IV crush

If you think the move will be smaller than expected:

• Sell an iron condor or iron butterfly with short strikes outside the expected move
• Collect the inflated premium and profit from IV crush
• Use defined risk — never sell naked options into earnings

If you have a directional view:

• Buy a call spread (bullish) or put spread (bearish)
• The spread reduces the IV crush impact compared to a single option
• Size smaller than normal — you can be wrong

Step 3: The Announcement

Once earnings are released:

• Read the headline numbers: Revenue, EPS, and guidance. These drive the initial reaction.
• Check the stock's after-hours/pre-market move. Is it within the expected move or beyond it?
• Wait 15-30 minutes before acting. The initial reaction often reverses or extends. Do not knee-jerk.
• Compare the move to expectations. A stock that beats estimates but drops means expectations were even higher.

Step 4: Post-Earnings Strategies

If you sold premium (iron condor, short straddle):

• Close the position the morning after earnings
• IV crush has already done most of the work for you
• Do not hold for the last 10% — take the profit and move on

If you bought options:

• Sell immediately if the move happened in your favor. IV crush accelerates quickly
• If the stock moved against you, close for whatever value remains. Do not hold hoping for a reversal

Post-earnings directional plays:

• After IV crushes, options are cheap. If you have a post-earnings directional view, this is a good time to buy options
• Post-earnings drift is a real phenomenon — stocks that gap up often continue higher for 1-2 weeks
• Use 30-45 DTE options for post-earnings directional trades

Step 5: After-Hours and Pre-Market Considerations

Most earnings are released outside regular hours:

• You cannot trade options in after-hours or pre-market (options only trade during regular hours 9:30-4:00 ET)
• The gap is where the risk lives. If you hold an iron condor through earnings, the stock gaps overnight and you cannot adjust
• Pre-market moves can reverse at the open. A stock down 5% pre-market may only be down 2% by 10:00 AM

This is why earnings trades are inherently risky — the move happens when you cannot trade.

Step 6: Position Sizing for Earnings

• Max 2% of account per earnings trade. This is a binary event.
• Use defined-risk strategies only. Iron condors, spreads, defined-risk butterflies.
• Never sell naked options through earnings. A stock can move 20-30% on bad news.
• Spread your risk across multiple earnings rather than concentrating on one stock.

Step 7: Track and Learn

After each earnings trade:

1. Record the expected move vs. actual move
2. Was IV crush as expected?
3. Did your strategy work as planned?
4. What would you do differently?

After 10-20 earnings trades, you will develop an intuition for which situations offer the best risk-reward.

Summary

Earnings day trading requires preparation: know the expected move, past moves, report time, and have a strategy before the announcement. Sell premium if you expect a small move; buy if you expect a big one. Close positions the morning after. Size to 2% of account max. Track results and learn from each trade.