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How to succeed with earnings trades using options

Unlock the secrets of earnings trades —strategies, pitfalls, and the power of implied volatility explained by an expert trader.

January 27, 2025

Earnings season can be a goldmine for options traders, but it’s also a minefield of potential pitfalls. In this video, Brad F. from North Carolina, an expert in earnings trades, shares strategies, risks, and insights to help you succeed with earnings trades. Brad is admin of the Facebook group Only Earnings (options trades and ideas).

Watch the video about earnings trades

The video was produced with Streamyard – an easy-to-use and amazing tool for live streaming and recording.

The allure of earnings trades

Earnings trades are unlike any other options strategy. As Brad explains, they offer traders the opportunity to make quick profits because you’re only in the market for a short time. The predictable nature of earnings events—you always know the exact date—means there’s no guesswork about timing.

But with high reward comes high risk. The fast price movements, combined with the volatility crush (IV crush), make it essential to have a clear strategy and the discipline to stick with it.

The two key approaches to earnings trades

Brad breaks earnings trades into two main categories:

Pre-earnings (rising IV):

  • This strategy takes advantage of the consistent rise in implied volatility (IV) leading up to earnings. As market makers adjust options prices higher to prepare for potential large moves, traders can enter positions expecting this IV ramp.
  • However, as Brad emphasizes, rising IV doesn’t always translate into profits. Factors like theta (time decay) can offset IV gains.
  • One of Brad’s favorite strategies is to buy a long straddle a few days before earnings.

Post-earnings (IV crush):

  • The most popular approach involves playing the IV crush immediately after earnings. By entering short volatility trades, such as iron condors, traders can profit when options prices drop dramatically following the earnings announcement.
  • Brad cautions that while backtests often show high win rates for this strategy, real-world results can differ, requiring patience and the willingness to endure occasional losses.
  • A popular IV crush strategy is to sell an Iron Condor just before the earnings – and close it after the announcement.
    Illustration of the two main categories of earnings trades
    Implied volatility tends to rise before earnings and crush right after the announcement is out. This pattern opens up for long volatility trades before the earnings and short volatility trades though the earnings.

    Why IV crush happens

    Brad offers a simple explanation for the IV crush phenomenon: Market makers keep options prices elevated before earnings to protect themselves from large stock moves. Once the earnings event passes and the risk decreases, these elevated prices drop, causing the IV crush.

    Lessons learned the hard way

    Brad’s experience highlights the importance of managing risk in earnings trades:

    • Don’t trade naked: Always use defined-risk strategies, like buying long protection, to avoid catastrophic losses.
    • Position sizing matters: Brad sticks to no more than 5% of his account per trade, ensuring that even big losses won’t derail his portfolio.
    • Patience Is key: The low win rates of some strategies can make them tough to stick with, but long-term results often reward persistence and a high number of occurrences.

    Common pitfalls and how to avoid ahem

    New traders often make the mistake of diving into earnings trades without proper preparation. According to Brad, the most common errors include:

    • Giving up too early due to a string of losses.
    • Misunderstanding how IV interacts with theta and price movement.
    • Failing to analyze historical data to identify stocks that are more predictable during earnings.

    Brad’s tips for success

    1. Backtest, backtest, backtest: Analyse historical earnings patterns for different companies.
    2. Focus on consistency: Build a watchlist of stocks with predictable earnings behavior and stick to proven strategies.
    3. Learn continuously: From academic papers to online communities like Brad’s Facebook group, resources abound to help you refine your approach.

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