Trading Earnings to Elevate Earnings

I want to elevate my earnings by trading companies’ earnings. Earnings season be an exciting and profitable time, and it often is a very volatile time. But it is also a risky time.

Options traders look forward to the earnings season because larger stock price moves can present outsized opportunities for traders to elevate options trading earnings. 

The reason for this is that when companies release their earnings reports, their stock prices often react with higher volume and volatility. Earnings reports provide a binary event catalyst that often results in price gaps up or down the following day.

Exceptionally strong or weak performance can result in a stock price gap up or down. This draws in more traders generating swift price moves that can be traded for quick profits, but also quick losses . The stock behavior can change dramatically and act “abnormal” for a period of days.  So it can also be a risky time.

This is why for ‘standard’ options trading the advice is to not trade the underlying in the period leading up to the earnings report date. Or open a position far enough in the future that you don’t hold the position around the earnings event. Also, if an earnings announcement is 40 days away, and the options expiration date is 30 days away, you can still trade since the volume and volatility leading up to the earnings date probably will still be ‘normal’.

So options trading earnings is a specific play with its own characteristic and rules. Earnings trading can be very profitable if done correctly. For that you need to understand what happens to the options market around earnings date.

Upcoming Earnings

Table of Contents

Earnings Reports

The earnings release is a kind of quarterly report card, composed of three calendar months as required in the US by the SEC(Form 10-Q). It discloses the companies’ financial performance for the prior quarter. Companies will usually provide a press release and follow up conference call providing further insights and potentially forward guidance. And the market react to this

So in a year there will be four earnings reports. The fourth quarter earnings release is often combined with the annual report which provides the full-year review detailing the corporate strategy and business operations moving forward. The annual report is filed with a Form 10-K.

Day Trading Earnings Reports

The quarters may not correlate with the regular calendar year. Some companies will have their fiscal year end earlier than the calendar year, so the “fiscal” first quarter for instance in September, instead of December.

What to Watch for in an Earnings Report

When quarter’s earnings are released, investors will gauge that performance against the expectations that had been set three months ago. You can find out the exact date of earnings on the company’s investor relations page.

Here are the basic key financial metrics to watch for:

  • Revenue – sales of the preceding quarter for customers invoiced, or ‘top line’.
  • Profit – money made after subtracting expenses from revenues, or ‘bottom line’.
    • Gross profit – revenues -/- cost of goods sold (direct labor, materials used) excluding fixed expenses (rent, salaries).
    • Operating profit – earnings-before-interest-depreciation-amortization-and taxes (EBITDA), including fixed expenses (rent, utilities and salaries), excluding tax and interest paid on debt or investment income.
    • Net profit – money left over after subtracting all expenses from revenues, excluding taxes and interest payment (expenses > revenues = loss).
  • GAAP/Non-GAAP (Generally accepted accounting principles) – form of accounting used (non-GAAP numbers leaves out GAAP restrictions and is for analysts better to gauge actual performance.
  • Earnings-per-Share (EPS) – EPS = net profits/number outstanding shares (note: buyback programs inflate EPS).
  • Cash flow – cash in and out of business, the company’s ability to generate cash to remain solvent and generate growth.
  • Year-over-Year (YoY) growth – percentage growth or decline for the same quarter in the prior year, to determine how well a company is growing or declining in terms of top and bottom line performance.
  • Analyst estimates – the average of the predictions by analysts covering a stock, and therefore the benchmark for performance.
  • Guidance – the companies’ own guidance or forecasts for upcoming quarters
  • Earnings calls – earnings conference call by companies can provide deeper insights into the performance by providing highlights of the current quarter, forward guidance and addressing questions directly from analysts and investors.
  • Other insights – subtle clues in earnings calls, articles etc. like stagnant or slumping sales in a division, large partnership, future investments, headwinds and tailwinds


Even when a company generates a positive number, its stock can still take a significant hit if it doesn’t exceed expectations by beating the estimates.

If a Company beats its EPS estimates, but the stock drops, then the market may be focusing on lowered forward guidance or discounting one-time events like a sale of a division.

It may be a case of financial engineering that shows EPS growth YoY, but that’s due to a smaller number of outstanding shares due to buybacks. In that case, compare the net profit/income YoY to get a better indication of actual growth or financial engineering.

The same applies on share prices that spike on seemingly weak earnings. The company may have raised its top and bottom line guidance for the next quarter or hinted at a big contract win in the conference call. (source: Centerpoint).


The traders’ expectations drive implied volatility (price fluctuation expected by traders in the future). The higher the efluctuation expected, the higher the implied volatility (IV).

An underlying’s IV will generally go up as it goes into earnings, because there is a lot of uncertainty (so risk) around what will happen during the earnings announcement.

The market will take last quarter’s earnings predictions into account and compare whether the company has met those predictions. The stock price up to earning have factored in the original predictions, so will most likely move up (predictions beaten) or down (pfredictions missed) if they are not met.

At earning announcement the market processes that new information and react. This will trigger the upward or downward movement in the stock price. This causes increased volatility and increases option premiums (they vebome more expensive).

During the recent periods of market volatility, options needed to price an earnings event, but also the potential for a broad market swoon that day or that week, Therefore, earnings expected moves weren’t and aren’t necessarily pure reflections of that company’s earnings, but also are influenced by the overall market situation.

When volatility increases, the premium on the option also increases, and everything becomes more expensive.

For short premium options traders, this creates opportunities to sell relatively expensive options and profit from their decline in value before the earnings date.

After earnings release, the volatility goes down because the market has a relatively better understanding and less uncertainty of the company’s future ( ‘volatility crush’). The option’s value goes down again.

Do Options Always Behave the Same Around Earnings?

Of course, we don’t always see a volatility drop, but in most cases, we’ve researched that IV drops very quickly after the earnings event.

We also don’t also see a volatily boost before earnings always, as this season in January 2023 apparantly seems to prove.

Implied volatility in options has contracted following the CPI release.The VIX as it fell from an already low 21 the prior week to 19.5.

However, IV near-term SPY options pricing came down from the uncertainty of the CPI numbers last week of around 27 IV, to the low teens this week (9.7 on 22 Jan). This is irregular, especially with an earnings season picks up and risk around the US debt ceiling negotiations. IVx (Tastyworks‘ implied volatility per expiration indicator) in SPY options is just 12.

So IV is the lowest in some time this time, despite earnings season. That in turn means IV in individual stocks may be the lowest they’ve been into an earnings event in some time.

Traders seemd to be more worried about the next Fed moves than that companies’ prior quarters.

That’s something to keep in mind with any new option positions around earnings events.

IV does start to pick back up the first week of February around the next FOMC meetings and CPI/NFP economic data. Today SPY’s IVx is around 20, double the IVx today.

In other words, macroeconomic news is still the driver of high option volatility (until it isn’t).

So, it’s a different earnings environment this time around. Options are actually cheaper into this earnings than companies’ stock has traded on average over the past year. With that information at hand, it may make sense to compare credit and debit spreads to express a view.

Options Trading of Earnings

There are different plays to trade earnings just before (growing volume and volatility) or after the release (trading the reaction).

Please take note that, price can still move dramatically especially in the after-hours. Day traders only consider trading during market hours when there is the most liquidity. Swing traders therefore have to be very prudent when trading earnings.

Trading Off Earnings Reports
Source: Centerpoint

Rules, Sizes and Stops

Put extra rules in place in addition to the rules you already have for the strategies you choose to use when trading earnings:

  1. Since trading earnings is high risk inherent with earnings-related volatility, only allocate a very small percentage of your portfolio to such trades (like not more than 5% of your portfolio in active earnings positions at any given time).
  2. In addition, also reduce the size of your trades even further than what you normally have set as a rule for ‘standard’ positions.
  3. Keep the holding time to a minimum.
  4. Have a (mental) stop-loss set and ready to execute immeditaely if the position goes against you.

Discipline is critical and cutting losses quickly is the key to survival.

Earnings Options Strategies

There are two primary options selling strategies around earnings I focus on to take advantage of volatility:

  1. High volatility: Iron Condors, Short Straddles, Short Strangles and Vertical Credit Spreads.
  2. Low volatility: Vertical Debit Spreads.

Since it is difficult to project what the earnings results might be for a company and you don’t know how the markets might react I prefer making earnings trades based on how much the stock might move regardless of direction. So, the earnings options strategies can also be catagorized in another way:

  1. Neutral: short iron condors, short strangles and short straddles
  2. Directional: vertical and calendar spreads

Predicting the Move

This is what I found in an article by SMB Training.

  • Look at the price of the straddle in the closest expiring weekly option series. A straddle’s price is the price of the at-the-money put and call added together.
  • If the stock is reporting its earnings tomorrow and trading at 100 and has a weekly option chain expiring in three days, you’d want to look at the price of the 100 straddle.
  • If the price is $6, that means the market is expecting a $6 move in either direction, or 6% of the stock price.
  • Then look at the history of earnings over the past year or two to observe the average move related to earnings for this stock.
    • If the stock usually moves less than 6% around earnings date, that might be a clue that the straddle may be overpriced, and you need to do further research
    • You could sell an iron condor with short strikes one strike beyond the predicted move implied by the price of the short straddle. If you are right, the iron condor should be profitable very quickly as the two credit spreads of the iron condor lose value as a result of the “volatility crush” of options after earnings. 
    • If your research shows that the straddle price is cheap compared to prior earnings moves and thus you think the stock will move more than is priced into the straddle, you can buy the straddle itself. The risk is if the stock doesn’t move much and thus the value of the straddle will be lost due to the post-earnings volatility crush.

So as you can see, the iron condor benefits from a volatility crush while the long straddle loses value from the volatility crush, but, in the event of an outsized move, the long straddle will benefit from the size of the move itself.

Selling Options Strategies in High Volatility Earnings Periods

In ‘normal’ (so high volume/volatility) earnings environments, we need to focus purely on option strategies in which we are net sellers of options.

When volume/volatility is high, that range can be assumed to be higher than it normally is. I use the market’s VIX and a stock’s IVR to define this.

The goal is to make use of the concept of volatility crush and make trades that take advantage of the volatility.

Neutral/Rangebound: Short Iron condor

The short iron condor strategy counts on two things:

  • High volatility.
  • A rangebound stock.

Iron condors result in a credit, so it pays money upfront and creates a range of safety at both sides of the underlying price. If the stock price remains within that range by expiration, you exit the trade and keep the credit.

Set-up before Earnings

The set-up is slightly different from the set-up of the ‘standard’ short iron condor.

In the case of selling earnings options trading strategies, the entry date for an option should be closer to the earnings date (to capture higher premium for higher volatility) with an expiry date should be as close as soon as possible after the earnings date (to capture the ‘volatility crush’).

Exit or roll positions after earnings

Managing the position (closing the existing position and opening a new one at the same time) after the stock re-opens post-earnings is different from the ‘standard’ short iron condor adjustment/management rules.

If the stock moves outside one of the wings’ short strikes and goes ITM:

  1. Roll out the option to the next contract month and take in more premium to give yourself more time to profit while at the same time also widening your break-even points;
  2. Roll up (put side) or down (call side) the non-challenged wing of the position to give you a higher statistical chance of making money even if the stock moves against you at first.
Short Straddles and Short Strangles for Earnings Trades

Short straddles and short strangles are two other rangebound, high volatility strategies you can use. But with a small account this is too risky.

This is more for advanced traders or traders with accounts above $50,000. So I have to quintuple my present account before even considering using shoer strangles or straddles.

Directional: Vertical Credit Spreads

Typically credit spreads into earnings take advantage of high implied vol, and build a buffer of not only the potential move in the stock, but also by being on the correct side of falling IV after the event.

Also the set-up of a vertical spread should be just before earnings for an expiry date directly after earnings.

Warning: betting on one direction during earning season is very risky. It is difficult to adjust later as necessary.

Adjusted Options Strategies in Low Volatility Earnings Periods

Probably the best advice is to not trade at all if the volatility going into earnings. Selling options with high implied volatility, you is always much better off than buying options around earnings.

However, if you want to try your luck once in a while, you can try out a vertical debit spread, if the risk/reward looks good (better than using a credit spread).

Directional: Vertical Debit Spreads

When IV isn’t high, the breakevens of credit spreads will be really tight, as are the breakevens of debit spreads.

The issue with debit spreads is always that you need a move in your direction, while with credit spreads you have a buffer built in to be slightly wrong.

But in low IV environments that advantage starts to blur, and the risk/reward of what seem like very likely moves can come into better focus. Which allows also vertical debit spreads. I recommend in that case to even further lower the position’s size and have stricter stops.


The release of earnings is normally a binary event involving significant uncertainty. Initially, this uncertainty triggers IV to spike, and once earnings are announced, IV crashes.

Understanding this central concept will take the guesswork out of options trading and enable investors to move forward, build upon that knowledge and leverage profitable options strategies.

But as we see this month, there can also be earnings events showing ‘abnormal’ circumstances, like very low IV for companies going into earnings. In this case it may be better not to earnings trade at all.

Trades on: end of day before earnings day

Very liquid stock above 25 dollar

Ask price = not higher than 10% bid price

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