As a trader with decades of experience in the options market, I’ve seen firsthand how earnings season can create both incredible opportunities and serious pitfalls. When companies release their quarterly financial reports, stock prices can swing wildly, presenting traders with unique ways to profit.
So how does one try and take advantage of these uncertain moments for a stock? It starts with looking at its Implied volatility (IV).
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What Is Implied Volatility?
The IV is a measure of expected price fluctuations based on market sentiment and demand for options. Before earnings, anticipation drives IV higher as traders speculate on potential price moves. After earnings, this uncertainty about earnings results disappears, leading to what we call IV crush—the diminishment of implied volatility.
IV and uncertainty go hand in hand. Once we know the stocks quarterly results, we know where the stock stands. There’s no guessing here, at least not in the short term, which begs the question…
Is It Better to Trade Options Before Earnings or After?
The answer? It depends.
Your approach should align with market conditions, risk tolerance, and the specific stock’s behavior around earnings. You also have to consider macroeconomic conditions, investor sentiment, and whether the company’s guidance will fuel additional movement.
That’s a pretty cookie-cutter answer though. So let’s dive into both strategies—pre-earnings and post-earnings—so you can get a better understanding of the IV and how you can take advantage in different scenarios.
Pre-Earnings Options Trading Strategies
Earnings season presents both high-risk and high-reward opportunities for options traders. The key is understanding how implied volatility (IV) behaves before earnings reports and structuring your trades accordingly. Some traders aim to capitalize on the expected surge in IV, while others focus on directional plays based on historical earnings performance.
The Pre-Earnings Straddle
One of the most well-known earnings strategies is the straddle, which involves buying both a call and a put at the same strike price. With this trade, you’re expecting volatility, but are unsure of what direction the stock may be heading. As you could reason, this trade profits from a big move in either direction.
For the golf fans out there, it’s like betting on Tiger Woods to either finish in the top 10 or miss the cut. If he does either, you win. But if he just hovers around the middle of the leaderboard, playing steady but unremarkable golf, that’s when you lose—just like a straddle loses when the stock doesn’t move much. In that case, your downside is limited to the premium paid.
Why It Works: IV typically spikes before earnings, which inflates options premiums. If the stock moves significantly after earnings, a well-timed straddle can be a home run despite the IV crush.
Risk Factor: If the stock doesn’t move enough, IV crush can erase profits fast. Traders also need to be mindful of broader market trends, as external forces can impact stock movement post-earnings.
When to Use It: This works best for high-volatility stocks with a track record of big earnings reactions. Look for stocks that frequently exceed analysts’ expectations.
Buying Calls or Puts Before Earnings
Some traders prefer a directional bet, purchasing calls (bullish) or puts (bearish) before earnings. But this isn’t about guessing—it’s about identifying strong setups.
Going back to my golf analogy, this is like betting that Tiger either makes the cut or misses it—one specific outcome, no hedge. If you’re right, you win big. If you’re wrong, you lose your bet entirely. There’s no in-between.
Why It Works: If the stock moves significantly in your favor and exceeds expectations, returns can be massive. Strong earnings surprise numbers often push stocks beyond market forecasts.
Risk Factor: If the stock doesn’t move enough—or moves in the wrong direction—the trade can result in a 100% loss. Sentiment plays a big role, so even strong reports can result in sell-offs if expectations were too high.
When to Use It: This strategy is best when you have strong technical and fundamental evidence supporting a big move. Checking past earnings trends can provide critical insight.
Why Volatility Rises Pre-Earnings
It’s all about supply and demand. Heading into earnings, option volume typically increases and thus the sellers keep raising their prices until supply meets demand.
For traders buying options, this means higher upfront costs, but it also presents potential for larger profits—if the stock moves enough. However, if the move isn’t big enough to compensate for the inflated premium, traders can still lose. That’s why managing IV risk is crucial.
Post-Earnings Options Trading Strategies
One of the biggest mistakes traders make is failing to anticipate IV crush. It’s like losing the World Series and expecting your star player to re-sign with you—only for them to leave for your biggest rival. The warning signs were there, but you ignored them. Just as it was obvious to some that the player was leaving, it’s a certainty that IV will drop after earnings.
After the earnings report, uncertainty disappears, and IV plummets—which can leave unprepared traders with rapidly devalued options.
Why It Matters: You can predict a stock’s direction perfectly, but if IV collapses, your options may still lose value. That’s why I stress hedging against IV crush in my strategies.
How to Avoid It: Rather than buying single-leg options, I recommend spreads that help mitigate IV collapse while still allowing traders to capture profits.
The Post-Earnings Straddle Strategy
This strategy involves buying a straddle after earnings, taking advantage of underpriced volatility for a potential secondary move. It’s like the Philadelphia Eagles signing Saquon Barkley, when most of the league thought he was an over-the-hill 27-year-old running back..
Like the Super Bowl winning player, the options may be cheaper than they should be, offering opportunities for traders who can spot mispriced volatility.
Why It Matters: You can predict a stock’s direction perfectly, but if IV collapses, your options may still lose value. That’s why I stress hedging against IV crush in my strategies.
How to Avoid It: Rather than buying single-leg options, I recommend spreads that help mitigate IV collapse while still allowing traders to capture profits.
Selling Iron Condors & Credit Spreads – Taking Advantage of IV Drops
Instead of buying options, some traders sell options spreads to capitalize on IV crush. Traders sell option spreads after earnings because implied volatility (IV) drops sharply, making option premiums cheaper.
By selling spreads, they can collect premiums on overpriced pre-earnings contracts that have now lost value, profiting from the natural decline in volatility
Why It Works: Since IV collapses after earnings, selling options spreads allows traders to collect premiums on expensive pre-earnings contracts that have lost value.
Risk Factor: If the stock moves beyond your expected range, losses can add up quickly.
When to Use It: Best when a stock has already made its big move and is expected to consolidate.
Managing Risk Around Earnings Reports
Here are a few ways you mitigate risk when trading before and after
How to Avoid IV Crush Losses
- Trade spreads instead of single-leg options to hedge volatility risk.
- Exit trades before earnings if IV has expanded significantly.
- Avoid overpaying for high-IV options.
- Analyze past earnings moves to set realistic expectations.
Delta Hedging Strategies for Earnings Season
- Delta-neutral strategies like straddles and strangles can provide non-directional exposure.
- Adjust positions as IV changes to optimize profits.
- Hedge risk with opposite market positions.
Stop-Loss and Exit Strategies for Earnings Trades
- Pre-Earnings: Lock in profits before earnings if IV has spiked.
- Post-Earnings: Cut losses if the stock doesn’t move enough.
- Rolling Strategies: Extend profitable positions if IV remains high after earnings.
Should You Trade Pre-Earnings or Post-Earnings?
Pre-Earnings:
- Higher IV = More expensive options.
- Potential for massive gains if the stock moves enough.
- High risk due to IV crush.
Post-Earnings:
- Lower IV = Cheaper options.
- Less uncertainty, but requires precise timing.
- Opportunities in secondary moves and trend reversals.
When to Use Each Strategy
- Pre-Earnings: Best for stocks with historically large earnings reactions.
- Post-Earnings: Best for stocks that continue trending after the event.
- Hybrid Approach: Some traders use a mix of pre-earnings and post-earnings strategies for balanced risk.
How to Develop Your Edge in Earnings Trading
Earnings season is a goldmine of opportunities for options traders, but only if you know how to approach it the right way.
Want to master earnings trading? Apply for Prosper Trading Academy today and learn how to execute these strategies with confidence.
