Options Trading Around Earnings Announcements: Strategies for Profiting

Earnings announcements present unique opportunities for options traders to secure positions, stocks, and securities at reasonable prices. In the time leading up to a company’s earnings statement, market volatility due to uncertainty allows inventors and traders to swoop in and grab options that other investors are unloading.

Successful options trading around these announcements must be timed correctly around implied volatility and market reactions during earnings. Our guide will show you the best times to pounce on these opportunities when they present themselves each quarter. We’ll outline some solid profit-saving strategies when companies announce their performance and profitability.

Why Earnings Announcements Matter in Options Trading

An earnings announcement is a public statement that reveals a company’s profitability over a specified period. Most public companies release earnings in January, April, July, and October, so quarterly. If the company doesn’t announce per quarter, it’ll usually conduct an annual earnings announcement. The timing of these announcements is typically centered on factors like when competitors announce, the travel schedules of the executives in charge, or regulatory requirements.

Following the company’s statement of earnings, share prices will usually increase or decrease depending on how the company has been performing. These announcements can have significant impacts on the markets because they definitively show how profitable a company is. It can be a time of volatility as investors navigate how to protect their capital or analyze potential price swings.

Implied volatility is a metric that investors use to capture how the market sees future changes in a security’s price. This becomes a significant factor leading to an earnings announcement that drives price and value changes. Options prices might rise during this time as investors anticipate stock movement, but the prices will usually decrease once the announcement has been made and uncertainty is behind investors.

A prime example of how stock prices have moved significantly during past earnings is when Meta Platforms Inc. put out a lackluster earnings report on February 3, 2022. The company had way underperformed expectations, which caused investors to lose a lot of confidence in the stock. As a result, META lost $232 billion in market value in a single day! This is how much of an impact that earnings announcements can have when it comes to options trading.

The Risks and Rewards of Trading Options Around Earnings

Some investors and traders base their entire options trading strategy around company earnings announcements, yet this approach has its risks and rewards. Earnings trading can be enticing due to the massive discounts that can come with market volatility and the potential for quick profits. Still, there are downsides to this approach, such as unexpected price movement in the opposite direction.

Pros

• Gains can be quickly realized in earnings announcement trading.
• The market volatility around earnings season can lead to significant price movements where investors gain opportunities to lock in a profit.
• The upside potential is unlimited, and the losses are limited to the option’s premium (when buying options).
• The maximum profit is the premium received, and the downside potential is often unlimited (when selling options).

Cons

• The market volatility around earnings season can lead to significant price movements where investors could possibly risk a considerable loss.
• Risking your whole account on a single event is a big gamble.
• Because options are a decaying asset, losses can mount as quickly as gains are realized.
• It’s not enough to be right about the direction of a stock. You must also be right about the timing and magnitude to see a profit.

Perhaps the most dangerous element of earnings announcement trading is volatility crushes (IV crush). These can occur when traders buy up options before an announcement, anticipating a big price movement, and the market moves in another direction, leading to the prices dropping sharply in value. Volatility crushes can lead to big losses if investors have gone all-in on a certain stock and the market moves against them (sharp price movements in unexpected directions).

Navigating risk in options trading around earnings announcements can help investors have a strategy to mitigate risks while taking advantage of rewards. A few common mitigation tactics include the following:

• Putting stop-loss orders in place to limit downside risk.
• Buy put options or sell call options to protect against unexpected stock price drops (options hedging).
• Use dollar cost averaging to take advantage of the ups and downs in the market (invest the same amount regularly).
• Choose stable stocks that aren’t too much of a risk.
• Mitigate risk and still earn profits by using covered calls around earnings announcements.
• Use the 1% rule to size your positions properly.

Pre-Earnings Strategies

You can trade options based on companies’ earnings announcements or reports in two ways: employ a trading strategy before or after the announcement. In this section of our guide, we’ll highlight the best strategies for trading options before the company releases its profitability report.

Buying Call/Put Options

This basic strategy is suitable for traders who predict a significant increase or decrease in the stock price. Buying calls and capitalizes on directional moves in the market or with specific stocks. Investors purchase call options when they think a stock’s price will rise in hopes of a potential increase. Losses are limited to the premium an investor pays for the option, and buying call options can be done with less money than the asset itself.

Investors should purchase put options if they think a stock’s price will fall off. Unlike buying a call option, investors buying put options can profit from any potential decreases. Take the difference between the stock price and the option strike price, and you have the exact amount of profit from buying a put option.

Straddles and Strangles

Straddles and strangles are options strategies that traders can use when they expect a significant price move in an underlying stock but aren’t confident of the price’s direction. These two strategies differ regarding the risk vs. reward profile and cost structure. Still, both can be used to secure a profit in volatile markets as both are volatility strategies.

• Straddles: This strategy for options trading involves simultaneously buying and selling a call and putting an option for the same underlying security. Each option has the same expiration date and strike price. It’s used when a trader isn’t sure of the direction of the market’s price movement. It’s most effective for high-volatility investments because investors believe the market’s price movement direction is volatile.
• Strangles: This strategy for options trading involves buying and selling a call and a put option with the same expiration date but a different strike price. It’s an ideal approach for an investor who expects a significant price movement with underlying securities but isn’t too sure about the overall direction.
• Long Strangles: These pay off when the underlying asset moves aggressively in either direction by the expiration date. They are the result of options being purchased.
• Short Strangles: Short strangles occur when investors sell options. They pay off when the underlying asset doesn’t move too much in either direction.

Both straddles and strangles are effective strategies for gaining profit from volatility regardless of direction. Specifically, straddles are helpful in earnings season for high-volatility stocks and work well for confident investors for the following reasons:

• Straddles profit from upward and downward price movements.
• There’s limited risk from straddles because the maximum loss is limited to the premium paid.
• You don’t need to be as accurate with the price forecast using straddles because they benefit from significant price movement for the expiration date, and there’s no need for exact predictions.
• Straddles don’t require investors to invest as much capital when considering buying or shorting stocks.
• If the price moves favorably before the expiration date, the profits from strangles could potentially be unlimited.

When trading strangles, it’s important to remember that both the call and put options require premiums to be paid out, and profits require a sizable price change in the underlying asset. It’s also essential to actively manage your positions to control risks and profits more effectively. Remember, too, that generating profits from a straddle can be challenging due to major market movements.

Bullish and Bearish Spreads

Vertical spreads are another way of referring to bull call spreads and bear put spreads. They’re a trading strategy in which investors simultaneously buy and sell options on the same underlying asset but with different strike prices and the same expiration date.

• Bull Call Spreads: This consists of one long call with a lower strike price and one short call with a higher strike price. The expiration date and the underlying stock are the same for both calls. As the underlying stock’s price rises, it’s established for profits and net debit.
• Bear Put Spreads: This options strategy involves simultaneously purchasing and selling puts on the same underlying asset with a different strike price but the same expiration date.

The risk during these vertical spreads is determined by the difference between the strikes and credit received (including transaction costs). This strategy can help investors limit losses while generating a profit from directional price movement on the underlying security. Another benefit of vertical spreads is freeing up funds for additional trading opportunities. With vertical spreads, investors can lower their prices by selling other options against the one they want to purchase.

Post-Earnings Strategies

Following an earnings announcement, investors will realize a specific company’s revenue figures will be either better or worse than expected. Traders and investors alike consider buying or selling stocks based on whether they believe the market has successfully and accurately priced in the news.

IV Crush

“IV Crush” stands for implied volatility crush, which occurs when investors buy up options in anticipation of a big price movement based on an earnings announcement. Implied volatility is volatility that investors expect as a result of earnings announcements, which can have a drastic effect on pricing for securities, options, and stocks. IV crushes can be exploited, but the key is not to let the IV crush exploit you.

Generally, options traders shouldn’t buy long options directly before earnings announcements. Still, if you have a strong feeling that a significant movement will take place during the earnings report’s release, it could be worth the time to try and execute this maneuver. As long as you get the timing right and know where a company’s profitability might be, you stand to make a tidy profit if the market moves with your predictions.

Selling Iron Condors

In an options trading strategy, iron condors allow investors to bet on the relative stability of the underlying asset. It consists of two puts, two calls, and four strike prices. Each of these has the same expiration date. When the underlying asset closes between the middle strike prices at expiration, the iron condor approach earns the maximum profit intended.

The entire end goal of the iron condor is to profit from low volatility in underlying assets.

Iron condors can be modified with a bullish or bearish market. However, a delta-neutral options strategy delivers the most profit for the investor when the underlying asset doesn’t have much movement. Less than the premium received, the profit on an iron condor is capped at the premium you get, while potential losses are capped at the difference between the purchased and sold call/put strikes.

Follow the step-by-step guide below to set up your first iron condor today:

1. Purchase an out-of-the-money put with a strike price that falls beneath the underlying asset’s current price. This put is designed to protect against a major downside move to an underlying asset.
2. Sell the out of the money put or the at-the-money put with a strike price closest to the underlying asset’s current price.
3. Sell an out-of-the-money call and one at-the-money call with a strike price about the underlying asset’s current price.
4. Purchase an out-of-the-money call with strike prices that are higher than the current price of the underlying asset—this helps to protect against substantial upsides.

Covered Calls

Covered calls are ideal for investors seeking securities with an excellent long-term outlook. Because they are a good way to earn extra income from stable stocks, low-volatility stocks are easy to pick up following earnings announcements due to the sometimes drastic price shifts that occur during these times.

Using covered call strategies following an earnings announcement is welcomed, but sometimes, purchasing the stock and forgoing the covered call is best.

• After assessing potential price movement, decide whether to write a covered call following a price fall or simply buy the stock if the price is expected to rise.
• If the stock price is expected to fall following earnings, investors can write a covered call at a lower strike price to offset or prevent losses.
• When writing a covered call following earnings, avoid using an expiration date around the next earnings report or even major product releases by the company. This can result in significant price movement, which could affect how well your covered call will deliver.

If the stock price is expected to rise following earnings (a rebound), avoiding a covered call on the option might be best. Buy the stock and call it a day. You only want to do covered calls on stocks where you can collect a premium but not give up ownership—it’s only possible if the strike price isn’t reached.

Timing Your Options Trades Around Earnings

Before trading options around earnings announcements, it’s best to consider the possible risks associated with trading before or after the announcements. Much of this comes down to timing, but using helpful tools like earning calendars and technical analysis is equally important to simplify the process.

When to Enter

When it comes to options trading around earnings announcements, there are instances where you’ll want to trade pre-earnings reports and other scenarios where it’s best to do so post-earnings reports.

• Trading options before a company’s announcement can become risky, but if the predictions are correct, they could yield larger profits.
• Trading options after the company’s earnings announcement release can assist investors in aligning with long-term directional movement.

Importance of Monitoring IV Trends Leading Up to the Earnings Report

Monitoring IV trends is essential to companies’ earnings announcements to help investors avoid purchasing many options in anticipation of the market moving against them. Investors who track implied volatility trends can make smarter moves and not suffer crippling losses by holding a ton of options that drop off significantly in value following an ill-advised purchase in the hopes of cashing in on an earnings report.

Using Technical Analysis and Earnings Calendars to Time Trades

Investors can use technical analysis and earnings calendars to better time their trades and develop a sound trading strategy around earnings announcements. These tools can provide technical analysis, determining support and resistance levels for a company. They are perfect for placing volatility-related bets. Earnings calendars can identify when a company is releasing its following report and help you better plan your future trading strategies. On top of earnings calendars, there are also economic calendars that take things to the next level—investors can use these to pinpoint events that might impact trading decisions over the course of the next month or next year.

The Role of News and Analyst Expectations

Another meaningful way for investors to make the right moves in options trading around companies’ profitability and earnings announcements is to keep up on the latest news about the companies you’re interested in investing with. It’s never been easier to use social media or traditional news sources to discover what experts and analysts say about the market and specific companies. Follow people whose judgment you trust on the matter and use this to inform your options trading strategies.

• You can follow options trading experts and get their opinions on social media sites like YouTube, X, Instagram, or Facebook.
• Get information on the market from websites like MarketWatch, Finviz, Stock Rover, or Bloomberg.
• Watch shows on TV like Fast Money, Squawk on the Street, or Mad Money with Jim Cramer to get market insights.

Managing Risk in Earnings-Driven Options Trading

As we dive into the next section of our guide, learn how to manage risk in options trading driven by earnings announcements. Setting up clear boundaries for your capital and keeping your options strategies diversified are key components to successfully trading options around companies’ earnings reports and announcements.

Setting Stop Losses and Position Sizing

Stop loss levels are a predetermined price at which inventors and traders can close out a trade automatically to prevent future losses. They’re an effective tool for maneuvering successfully around market movements that go against you. Investors can effectively cut off investments that aren’t working for them, and they don’t have to do so manually. The bleeding in their portfolio is done automatically, so they don’t even have to worry about it!

Let’s talk about position sizing. Using the 1% rule, it is best not to blow through all your capital if the market goes against your investments. Each stock or security should only be allotted 1% of your total capital—you don’t want a ton of risk on a single position because this leaves you open to a bunch of risk.

When you calculate your position size, you’re dividing your risk per trade by the risk per share. Not only does position sizing help prevent potential losses, but it also keeps your portfolio adequately balanced where a healthy amount of risk is achieved.

Diversifying Options Strategies

To mitigate unexpected moves, it’s best to diversify your options trading strategies. The best way to balance risk and reward in your portfolio and build a sound investment plan is to use hedging techniques like buying puts or protective collars to avoid the common pitfall of overexposure in a single trade.

Hedging is when you make an investment that moves in the opposite direction of another asset in your portfolio. The idea is for the hedge to increase in value while the other investment loses its value—it’s to bring a steady equilibrium to your portfolio so you don’t suffer a loss with nothing to replace the value.

• Buying Puts as a Hedging Strategy: Investors can purchase pushes, which gives them the right to sell an asset at a specific price within a certain timeframe. Buying puts works as a hedge because it serves as downside protection for long positions. Options’ prices are determined by their downside risk (the likelihood that a hedged stock will lose value when there are significant market shifts), and options tend to be cheaper the further they are from the money or the expiration date.
• Protective Collars: Collars are formed by owning a stock and simultaneously buying protective puts and selling covered calls on a one-to-one basis. In this scenario, calls and puts only contain intrinsic value because they are “out of the money.” If the asset price declines due to market changes, the put you purchased will protect the expiration date.

A Real-World Case Study: Apple (AAPL)

Let’s examine a stock market case study and how investors have reacted to certain companies’ earnings announcements and reports. You can gain some insights into how earnings can impact trading decisions for the investor’s good and bad. We’ll examine Apple stocks to convey these main concepts.

Apple’s earnings announcement was on August 1, 2024, post-market.

Options are trading around a significant earnings announcement. The earnings forecast was FY2024 Q3 revenue of $84.37 billion, up 3.15% year over year, and EPS of $1.34, up 6.42% year over year.

The options market forecast leading up to Apple’s announcement was a stock price movement post-market of plus or minus 3.8%. Following earnings, there was actually a price change of plus 6.0%. Something interesting to note about Apple’s stock is that many options traders have tended to predict volatility with the stock over the past 13 quarters, even though it’s never reached expected heights.

Although Apple beat Wall Street’s estimates across the board during their earnings announcement, the stock began wavering between positive and negative expectations. ESP was up to $1.40 (10% up) in the quarter compared to $1.26 a year prior. Revenue was also up 4.9% to $85.8 billion compared to $81.8 billion a year prior. Total iPhone sales were down 0.9% overall.

Final Thoughts and Key Takeaways

Buying calls and put options, straddles/strangles, and bullish/bearish spreads are all great, profitable strategies for trading options around earnings announcements. Doing your research, using risk management strategies, and sticking to a sound investment plan are critical. Practice on a demo account before implementing strategies. Explore more in-depth strategies on OptionsTrading.org.