Earnings Options Strategies
Earnings announcements are the most clearly scheduled source of single-stock volatility. Every quarter, companies report financial results that can cause shares to gap 5%, 10%, or even 20% or more. Options let traders express earnings views with defined risk, and the pricing around earnings has features of its own that each structure below handles differently. This page describes what each structure pays; it does not say which one to use.
The Earnings Volatility Premium
Before earnings, implied volatility in short-dated options rises substantially as the market prices in the expected move. After the announcement, IV collapses, a phenomenon called "IV crush." This crush is the central challenge of earnings options trading.
The Implied Move: The common shortcut takes the at-the-money straddle price for the nearest post-earnings expiration and divides by the stock price. If a stock trades at $100 and the straddle costs $8, the straddle-implied move is 8%. That is not quite the one-standard-deviation move: an at-the-money straddle prices at roughly 0.8 of one standard deviation, so the one-sigma figure here is about $10, or 10%. Neither number is a forecast of the move. The expected move covers both calculations.
Historical Comparison: This sets the implied move against the stock's actual earnings moves over the past 8-12 quarters. If the stock has moved an average of 5% on earnings and the options market implies 8%, the current price is above that history; if historical moves average 10%, it is below. A handful of past reports is a small sample, and it says nothing certain about the next one.
Long Volatility Strategies
Straddle: A straddle buys the ATM call and put for the nearest post-earnings expiration. At expiration it pays off if the stock moves more than the straddle cost in either direction. The upside is open-ended; the cost is that IV crush and time decay erode both legs if the stock does not move enough.
Strangle: A strangle buys an OTM call and an OTM put (for example, the 5% OTM options on each side). It is cheaper than a straddle, but it needs a larger move to pay off, so it returns more per dollar on a large move and finishes worthless on a wider range of outcomes.
Double Calendar: A double calendar buys options in a farther-out expiration and sells options in the nearest weekly expiration at the same strikes. This structure benefits from IV crush in the near-dated options sold while maintaining exposure through the longer-dated options. It gains if the stock moves moderately and can lose if the move is very large.
Short Volatility Strategies
Iron Condor: An iron condor sells an OTM put spread and an OTM call spread, collecting premium. It keeps the premium if the stock stays within the range defined by the short strikes. It is a position that the actual move will be smaller than the implied move. The payoff is asymmetric: many outcomes keep a small premium, and a large move can lose a multiple of it.
Iron Butterfly: An iron butterfly sells the ATM straddle and buys protective wings (OTM call and put). This is a more aggressive short volatility position than the iron condor, collecting more premium but with a narrower profit zone.
Put Selling: A cash-secured put sold before earnings obliges the seller to buy the stock at the strike if assigned. If the stock drops below the strike, the effective purchase price is the strike minus the premium received. If it rises or stays flat, the seller keeps the premium. The risk is a large drop, which the premium offsets only in part.
Directional Earnings Plays
For a directional view on earnings, vertical spreads reduce exposure to IV crush compared with an outright option purchase:
Bull Call Spread: A bull call spread buys an ATM or slightly ITM call and sells an OTM call. The sold call offsets IV crush in the purchased call. The maximum payoff is the width of the spread minus the debit paid.
Bear Put Spread: A bear put spread buys an ATM put and sells an OTM put. Same concept applied to the downside.
The reason: when IV falls after the announcement, it lowers the value of both legs, so the net effect on the spread is smaller than on a single long option. The cost is a capped payoff.
Post-Earnings Strategies
Two approaches traders describe for after the announcement, set out here as what each assumes rather than as recommendations:
Gap and Go: Trading in the direction of an earnings gap assumes the move continues after the open. Whether it does is specific to the stock and the session, and a gap can just as easily retrace.
Fade the Gap: Trading against an earnings gap assumes the market overreacted. It carries the opposite risk: that the gap was the start of a larger move.