Earnings Play

Directional plays bet on the stock moving in a specific direction after earnings:

• Long calls: Bet the stock rises post-earnings. Risk: the entire premium. Vulnerable to IV crush even if the stock moves up modestly.
• Long puts: Bet the stock falls post-earnings. Same risk profile as long calls, just in the opposite direction.
• Bull/bear debit spreads: Directional with reduced IV crush impact because the short leg partially offsets the crush on the long leg.

Volatility plays bet on the size of the move, not the direction:

• Long straddle/strangle: Buy both a call and put, profiting if the stock makes a large move in either direction. Works when the actual move exceeds the expected move priced into options.
• Iron condor/short strangle: Sell premium on both sides, profiting when the stock moves less than expected. Benefits from IV crush. The most popular institutional earnings strategy because stocks move less than the expected move roughly 70% of the time.
• Calendar spread: Sell a front-month option expiring just after earnings and buy a back-month at the same strike. Profits from front-month IV crushing harder than back-month.

Pre-earnings plays profit from the IV expansion leading into the report:

• Buy options 2-3 weeks before earnings when IV is still low. Sell 1-2 days before the actual report to capture the IV expansion without holding through the crush. Lower risk than holding through the event.

The expected move is the range the options market prices in for the earnings event. It determines whether options are cheap or expensive relative to the likely outcome.

How to calculate it: Look at the at-the-money straddle (call + put at the nearest strike) for the first expiration after earnings. The straddle price divided by the stock price gives the expected percentage move.

Example: AAPL at $195, ATM straddle costs $12.00. Expected move = $12 / $195 = 6.2%. The market expects AAPL to move about 6.2% in either direction.

Compare to historical moves: Pull the stock's actual earnings moves over the past 8-12 quarters. If AAPL averaged a 4% move but options are pricing in 6.2%, the straddle is expensive — selling premium is favored. If AAPL averaged an 8% move and options price 6.2%, the straddle is cheap — buying premium is favored.

Win rate for sellers: Historically, stocks move less than the expected move about 70% of the time. This statistical edge is why iron condors and short strangles are the most popular earnings strategies among professional options traders. The 30% of the time that stocks exceed the expected move is when these trades lose — and those losses can be large, which is why defined-risk strategies (iron condors) are preferred over undefined-risk (short strangles).

Size conservatively: Earnings are binary events — the outcome is unknown. Never risk more than 2-3% of your account on a single earnings play. This applies to both long and short premium strategies.

Use defined-risk strategies: Iron condors and debit spreads have capped maximum losses. Avoid naked straddles and strangles unless you have deep experience managing them — a 20% gap move on a short strangle can produce catastrophic losses.

Close early if possible: For premium-selling strategies, if you have captured 50% or more of the maximum profit before the actual earnings date, consider closing the position. Taking guaranteed profit beats holding through the event.

Avoid illiquid options chains: Earnings plays require tight bid-ask spreads for clean entry and exit. Wide spreads (more than $0.50 on the straddle) eat into your edge. Stick to high-volume optionable stocks with weekly expirations.

Watch for after-hours/pre-market gaps: Most earnings are reported after the close or before the open. The stock can move significantly in extended hours, meaning your position is at risk even though the regular market is closed. This gap risk is non-hedgeable and is the primary risk of all earnings strategies.