Earnings Season Options Playbooks
Earnings Season Options Playbooks
Earnings announcements are among the most significant events for options traders. Implied volatility typically expands before earnings and collapses afterward, creating unique opportunities and risks. Having a playbook for these events helps you navigate the volatility cycle systematically.
Definition and Key Concepts
The Earnings Volatility Cycle
Pre-Earnings: IV rises as uncertainty increases. Options become expensive. Post-Earnings: IV collapses as uncertainty resolves. This "volatility crush" can exceed 30-50%.
Implied Move
The implied move is the market's estimate of how much the stock will move after earnings, derived from option prices:
Implied Move ≈ ATM Straddle Price / Stock Price
Example: Stock at $100, ATM straddle at $8.00 Implied move = $8 / $100 = 8%
This means the market expects the stock to move approximately 8% in either direction.
Historical Move Comparison
Compare the implied move to historical earnings moves to assess whether options are expensive or cheap:
| Company | Implied Move | Historical Average | Assessment |
|---|---|---|---|
| ABC | 8% | 6% | Options expensive |
| DEF | 5% | 7% | Options cheap |
| GHI | 6% | 6% | Fairly priced |
How It Works in Practice
Pre-Earnings Strategies
Long Volatility (Buy IV Expansion):
- Enter 2-4 weeks before earnings
- Buy straddles or strangles when IV is still low
- Sell before earnings to capture IV expansion (not the move itself)
Short Volatility (Sell Premium):
- Enter close to earnings
- Sell iron condors, strangles, or straddles
- Bet that actual move will be smaller than implied
Post-Earnings Strategies
Volatility Crush Plays:
- Enter immediately after the announcement
- Sell options when IV is still elevated from pre-earnings levels
- Capture the continued IV decline over subsequent days
Directional Plays:
- If you have a view on earnings outcome
- Buy calls (bullish) or puts (bearish) before announcement
- Risk: Volatility crush can offset directional gains
Strategy Selection Matrix
| Your View | IV Level | Strategy |
|---|---|---|
| Uncertain, move will be big | Low IV | Long straddle |
| Uncertain, move will be small | High IV | Iron condor |
| Bullish | Low IV | Bull call spread |
| Bearish | Low IV | Bear put spread |
| Neutral | High IV | Iron butterfly |
Worked Example
Case Study: Trading XYZ Earnings
XYZ reports earnings after the close on Tuesday. Current data:
- Stock: $75
- Days to expiration: 4 (Friday expiration)
- ATM straddle: $6.00 (implied move: 8%)
- Historical average move: 5%
- Current IV: 72% (vs. 30% normal)
Strategy 1: Iron Condor (Short Premium)
Trade:
- Sell $70/$67.50 put spread for $0.65
- Sell $80/$82.50 call spread for $0.55
- Total credit: $1.20
Thesis: Actual move will be less than 8%; implied move is overpriced.
Breakevens:
- Lower: $70 - $1.20 = $68.80
- Upper: $80 + $1.20 = $81.20
Outcome Scenarios:
| XYZ Post-Earnings | Result | P/L |
|---|---|---|
| $73 | Full profit | +$120 |
| $77 | Full profit | +$120 |
| $68 | Put spread at max loss | -$130 |
| $83 | Call spread at max loss | -$130 |
Strategy 2: Long Straddle (Long Volatility)
Trade:
- Buy $75 call for $3.25
- Buy $75 put for $2.75
- Total cost: $6.00
Thesis: Actual move will exceed 8%; something unexpected will happen.
Breakevens:
- Lower: $75 - $6 = $69
- Upper: $75 + $6 = $81
Outcome Scenarios (including IV crush):
Assume IV drops from 72% to 35% post-earnings:
| XYZ Post-Earnings | Intrinsic | Time Value Lost | Net P/L |
|---|---|---|---|
| $69 | $6 | -$2.50 | +$350 |
| $72 | $3 | -$2.50 | +$50 |
| $75 | $0 | -$2.50 | -$250 |
| $78 | $3 | -$2.50 | +$50 |
| $81 | $6 | -$2.50 | +$350 |
The straddle needs the stock to move about 6% just to break even after IV crush.
Risks, Limitations, and Tradeoffs
Volatility Crush Is Predictable but Powerful
The crush happens almost every time, making long premium strategies difficult. Even correct directional bets can lose money if the move is smaller than implied.
Gap Risk for Short Premium
Stocks can gap far beyond expected moves. A 15% gap when you sold an iron condor expecting 8% causes maximum loss quickly.
Timing Pre-Earnings Entries
Enter long volatility too early and theta decay consumes profits before IV expands. Enter too late and IV has already risen, eliminating the edge.
After-Hours Announcements
Most earnings are announced after market close or before market open. You can't adjust during the announcement—you're locked into your position until markets reopen.
Common Pitfalls
-
Buying straddles right before earnings: IV is maximum; volatility crush often exceeds gains.
-
Ignoring historical data: Not every stock moves the same. Some consistently underperform implied moves.
-
Oversizing positions: Earnings are binary events. A single blowout loss can erase months of profits.
-
Holding through when direction is wrong: If you're long and the stock gaps against you, the crush plus direction creates double losses.
-
Assuming IV crush timing: Crush usually happens immediately but can take 2-3 days to fully materialize.
Checklist for Earnings Trades
- Calculate implied move from ATM straddle
- Compare implied move to historical average moves
- Assess current IV relative to historical IV
- Determine if you're betting on direction, volatility, or both
- Size position for potential max loss
- Set clear profit and loss targets
- Know when the company reports (after close, before open)
- Plan for both gap up and gap down scenarios
- Consider closing positions before announcement if IV gain is sufficient
Next Steps
Earnings are one type of event that moves volatility. See Event-Driven Volatility Trades for strategies around other catalysts like FDA decisions, Fed meetings, and product launches.
For techniques to adjust positions around earnings, review Rolling Strategies Pre-Expiration.