How to Trade Options Around Earnings

Why Earnings Matter for Options Traders

Earnings announcements are the biggest catalyst for individual stock moves. A stock can gap 5-15% overnight based on the report. Options pricing reflects this — implied volatility (IV) spikes before earnings and collapses after. This IV behavior creates unique opportunities and risks.

Step 1: Understand IV Crush

Before earnings, options are expensive because IV is elevated. After earnings, IV drops sharply — this is called IV crush. Even if the stock moves in your direction, the collapse in IV can destroy your option's value.

This means:

Buying options before earnings is expensive and you need a big move to profit
Selling options before earnings collects fat premium but you face gap risk
The expected move (shown on most platforms) tells you what the market is pricing in

Step 2: Check the Expected Move

Most brokers display the expected move for earnings. For example, if XYZ is at $100 and the expected move is $8, the market expects XYZ to trade between $92 and $108 after earnings.

If you think the move will be bigger than expected: buy options (straddles, strangles)
If you think the move will be smaller than expected: sell options (iron condors, iron butterflies, short strangles)

Step 3: Choose Your Strategy

Bullish on Earnings:

Buy a call or call spread before the announcement
Be prepared for IV crush reducing your call's value even on an up move

Bearish on Earnings:

Buy a put or put spread
Same IV crush risk applies

Neutral / Selling Volatility:

Sell an iron condor or iron butterfly with strikes outside the expected move
Collect the inflated premium and profit from IV crush
Risk: stock moves beyond your strikes

Buying Volatility:

Buy a straddle or strangle if you expect a massive move
The move needs to exceed the expected move for you to profit

Step 4: Time Your Entry

Selling strategies: Enter 1-3 days before earnings when IV is at peak. The premium is richest.
Buying strategies: Enter 1-2 weeks before earnings to benefit from the IV ramp-up. Consider selling before the announcement to capture IV expansion.
Post-earnings plays: After IV crushes, options are cheap. If you have a directional view, this can be a better time to buy.

Step 5: Size Your Position Conservatively

Earnings are binary events. Anything can happen.

Never risk more than 2-3% of your account on a single earnings trade
Use defined-risk strategies (spreads, iron condors) instead of naked options
Accept that you will be wrong sometimes. A 60% win rate on earnings trades is excellent.

Step 6: Manage After the Announcement

If selling: Close the position the morning after earnings when IV has crushed. Do not hold for the remaining small profit if the stock moved close to your strikes.
If buying: Sell immediately if the move happened. The IV crush only gets worse with time.
If wrong: Accept the loss and close. Do not add to a losing earnings trade.

Common Mistakes

Buying expensive calls or puts right before earnings and getting crushed by IV even on a correct directional bet
Selling too close to the money — the expected move is not a guarantee, it is a probability distribution
Not knowing the expected move before entering the trade
Holding too long after earnings when IV crush has already done its damage

Summary

Earnings trades are about IV, not just direction. Understand IV crush, check the expected move, and pick the right strategy for your view. Sell premium when IV is inflated and you expect a small move. Buy premium when you expect a move bigger than what the market is pricing. Size small and manage quickly.