Trading Options During Earnings Season: What You Need to Know

by | Feb 7, 2023

Over the past few weeks, a certain aspect of options trading has become more and more important.

And if you don’t grasp this NOW, you could lose a lot of money by making misinformed trades.

But on the other hand, if you can get a basic understanding of this concept before other traders … you could potentially make a small fortune. 

You’re probably wondering what I’m getting at…

Well, if you’ve ever traded options around an earnings report, you’ve probably noticed that some odd things can happen to the prices of your contracts…

But why do options trade so differently during earnings season?

Increased liquidity, retail trading, and volatility all factor into how options are priced for an earnings report.

This leads to earnings trades being both high risk and (potentially) high reward. But you must be careful…

If you simply buy puts or calls prior to an earnings print, you’re not trading … you’re gambling. That’s no different than sports betting because anything can happen on any given day.

But that’s not to say there aren’t good setups provided during earnings season…

You just have to know when to put your earnings trades on and how options are priced during this extra-volatile time of the year.

Keep reading and I’ll show you…

The Pros of Earnings Season

For options traders, earnings season can bring some crazy trading opportunities…

People love to trade options during earnings season. It brings out the most degenerate, casino-like tendencies in traders.

Why is this a good thing? It gives us more liquidity to trade against. More money in the options market is great for experienced traders like me. (Hopefully, you’re getting the hang of it yourself!)

Are you familiar with this trading “loophole?”

Are you familiar with the “loophole” that helps small accounts grow exponentially?

No, it doesn’t have anything to do with penny stocks or crypto…

And this strategy works regardless of whether the markets are up OR down…

This little-known options “loophole” is something you can use to grow your trading account right now…

Not only does earnings season bring more liquidity — it breeds volatility. The swings based on earnings reports can be massive, making the options’ volatility even more exaggerated.

Liquidity, volume, and volatility are three critical factors I look for in any options trade. The fact that earnings season naturally delivers all three is hard for me to ignore.

So, what’s the catch?!

Well, there’s another factor that makes trading options during earnings season much more difficult than it may initially seem…

The Cons of Earnings Season

For options traders, the biggest obstacle to overcome during earnings season is higher-priced contracts due to elevated implied volatility (IV)

I often find that earnings winners don’t move enough, especially for the higher-priced stocks. 

Even if a company has solid earnings, the high IV (and expensive premium) makes it difficult to lock in the kind of gains I’m looking for.

For any options trade, I’m looking for 20% moves. That way, there’s enough meat on the bone to grab onto. 

During normal periods, a 20% move in the underlying stock will give me the 150%, 200%, or 300% gains that weekly options have the potential for. 

But during earnings season, IV can ruin these kinds of setups. The key to avoiding this is to understand how a particular options strategy dictates the price of contracts…

How ‘Implied Moves’ Are Calculated

When earnings season is upon us, market makers calculate the ‘implied move’ a stock will make after earnings by looking at the ticker’s at-the-money (ATM) straddles.

Straddles are a directionally-neutral options-trading strategy where you buy a put and a call at the same strike price. (You’re betting on a big move in either direction without having a bias toward either side.)

By adding the premiums of the ATM puts and calls together (and then multiplying that number by 85%), market makers determine the ‘implied move’ of the stock, and therein the price of the weekly options.

Are you a quitter?

It’s ok if you are…

Because quitting might be the best decision of your life.

Sound crazy?

Now, why should you care about this?

Because if you’re trading options around an earnings report, you need the stock’s post-earnings move to exceed the ‘implied move.’

If the implied move is +/-10%, and the stock only moves 8%, even the directionally-correct contracts will lose value.

This is how IV can ruin an options trade during earnings season and why I avoid making pre-earnings bets 99% of the time. 

Beyond IV, I’m picky about the sectors (and price action) I’ll trade during earnings. 

Not only do I want a solid earnings beat — I also want the stock to be in a hot sector with prices reaching fresh highs. 

By adding these catalysts, an earnings setup has a better chance of achieving the momentum I want to see.

Additionally, I recommend waiting until after the earnings print to put trades on. 

Don’t try to make a heroic prediction. Instead, wait for the news to hit the tape, then ride the reaction.

Final Thoughts

Earnings season is a double-edged sword. It can bring very profitable opportunities … but it can also confuse a lot of newer options traders.

I hope that after reading this you’ll have a better understanding of how options are priced so that you can avoid being bamboozled by sky-high IV.

Always look up the ‘implied move’ before putting an earnings trade on and, in general, wait until after the reports to enter.

Meet Mark:

Mark Croock is a former accountant who after studying under Millionaire Trader Tim Sykes turned his small account into $4.11 million in trading profits by applying Tim’s strategies to options trading.

He started Evolved Trader to pay it forward and help other traders learn how to leverage options


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