Four times a year, the stock market has its own sort of “Big Game” (you know the one we mean). Some of the largest publicly traded companies pull back the curtain on their finances, including their earnings, and investors collectively hold their breath.
For a few weeks, earnings season turns the market into a high-stakes arena where even a single number can send a stock soaring or plunging 10% before you’ve finished your morning coffee.
It’s an exciting time, but for many options traders, it’s also a confusing one.
Have you ever bought a call option because you were sure a company would report great earnings, only to see the stock go up and your option’s value go down?
If that feels like a personal attack, don't worry — you aren’t alone. You fell victim to implied volatility (IV) crush.
The earnings effect: volatility and expectation
Leading up to an earnings report, uncertainty is the main driver of price change. Nobody knows for sure what the CEO will say, and the market hates not knowing.
The pre-earnings run-up
As the big day approaches, traders flock to options to either hedge their bets or speculate on the outcome.
This surge in demand drives up the price of options across the board. The finance-speak way of saying this is the expression, "premiums are inflated."
Think of it like booking a hotel room: the price is standard on a random Tuesday in November, but it triples the weekend the Taylor Swift tour comes to town.
The expected move
Before you place a trade, you need to know what the market thinks is going to happen. The options market actually tells you exactly how much it expects a stock to move. It’s called the expected move.
Quick math
There are a variety of different formulas and approaches to calculating an expected move, but one rough is as follows:
Expected move ≈ (Price of at-the-money call + price of at-the-money put) × 0.85
For example, if a stock is trading at $100, and the nearest call and put both cost $5, the market is pricing in a move of roughly $8.50.
Expected move ≈ (5 + 5) × 0.85
Expected move ≈ (10) × 0.85
Expected move ≈ $8.50
The important part
When you trade options around earnings, you aren't just anticipating whether a stock will go up or down. You’re trading based on magnitude (if it moves more or less than expected) and timing (when it will happen by).
Understanding IV crush
If the expected move is a weather forecast, then implied volatility is like the humidity. It measures how much the market expects the price to swing.
The hurricane analogy
Imagine you live in a coastal town and a massive hurricane is forecasted to hit tomorrow.
Let’s say you decide to buy insurance right now. The insurance company, knowing the storm is coming, is going to charge you a massive "uncertainty" premium.
But, the day after the storm passes, the sun is out. Whether the house was damaged or not, the uncertainty is gone. If you tried to buy that same insurance policy now, it would be much cheaper.
In the world of options, an earnings report is like a hurricane.
Leading up to it, IV spikes because of the unknown. But, the moment the news is released, the uncertainty vanishes, and the volatility premium is sucked out of options pricing instantly.
This is IV crush.
The impact on long options
IV crush is why only buying a simple call or a put can be risky — especially during earnings season.
The stock might move in your direction, but if the drop in volatility is greater than the gain from the stock price, the option’s overall value falls.
For example, if you buy a call for $5.00 and the stock moves up, but the IV crush takes $1.50 out of the option’s value, you might still be underwater.
Key IV crush takeaways
Keeping the mechanics of IV crush in mind here are the main things you need to remember when it comes to trading options around an earnings report.
Buyers of options need the underlying asset to move more than the market expected. They have to champion over the IV crush.
Sellers of options (or those using spreads) are trying to benefit from the volatility premium being sucked out.
Defined-risk strategies for earnings
To survive earnings season, many professional-style traders avoid "naked" options (where risk can be theoretically infinite) and instead use defined-risk strategies.
That lets them know exactly how much they could lose before they even click "trade."
Here are some of the most common defined-risk strategies for earnings time:
The bullish play: the bull call spread (debit spread)
Best for: When you think a company will beat expectations and the stock will rise, but you don't want to overpay for premiums.
Setup:
Buy a call with a lower strike price
Sell a call with a higher strike price
How it works: By selling the higher-strike call, you collect a premium that helps "offset" the expensive cost of the call you bought. It also makes you less sensitive to IV crush. As the volatility drops, the option you sold also loses value, which is good for you.
Risk profile: Your maximum loss is limited to the price you paid for the spread.
The bearish play: the bear put spread (debit spread)
Best for: When you think a company will miss expectations or provide weak guidance. (Corporate-speak for “the future looks gloomy”)
Setup:
Buy a put with a higher strike price
Sell a put with a lower strike price
How it works: Just like the bull call spread, selling that lower-strike put lowers your cost of admission. It keeps your risk defined while allowing you to profit if the stock slides.
Risk profile: Your maximum loss is limited to the price you paid for the spread.
The "I just know it’s moving" play: the long straddle
Best for: When you have no idea where the stock is going, but you’re certain it’s going to make a massive, break-the-internet type of move.
Setup: Buy a call and a put at the same strike price (usually the current stock price)
How it works: This is the most expensive strategy because you’re buying two options during peak volatility. The stock move must be massive — more than the combined cost of both options — to profit.
Risk profile: Your maximum loss is limited to the price you paid for the spread.
The neutral play: the iron condor
Best for: When you think a stock is overhyped and won't actually move as much as people think it will.
Setup:
Sell a put with a lower strike price
Buy a put with an even lower strike price
Sell a call with a higher strike price
Buy a call with an even higher strike price
How it works: With an iron condor you’re expecting the stock to stay within a specific price range. You profit from IV crush by selling volatility on both sides while buying wings (further out-of-the-money options) to protect yourself.
Risk profile: Your maximum loss per side is the (wing width − credit) x the number of shares.
Managing risk during earnings events
You need to pay attention when you’re trading during earnings season.
Position sizing
Earnings are considered binary events. The company either wins or loses, and the stock moves accordingly.
Because the outcome could go either way, it’s considered standard practice to never use more than a small percentage (like 1 to 2%) of your total portfolio on a single earnings trade.
Timing the entry
After budgeting how much you can put towards the trade you’ll have to decide when to enter.
The early bird: Entering a few days before earnings allows you to catch the rise in IV. As uncertainty builds, the price of your options might actually increase even if the stock doesn't move.
The last minute: Entering minutes before the closing bell on earnings day is the purest form of the bet, focusing mostly on price. But, you’re paying the maximum possible price for the options.
The morning after plan
The morning after earnings come out, the markets are chaotic — especially in the first five minutes. Liquidity (the ability to buy or sell at a fair price) can be thin, and the bid-ask spread can be wide enough to drive a truck through.
In this scenario, it’s good to have an exit price in mind before the market opens. If you hit your profit target, that’s when you could consider taking it. Likewise a stop-loss can be a useful tool that some traders will use if the price goes against them.
Frequently Asked Questions (FAQs)
Q: Why did my option lose money even though the stock went up after earnings?
A: This is likely due to IV crush. The drop in implied volatility (the uncertainty premium) decreased the option's value more than the stock price increase added to it. To avoid this, consider strategies that involve selling some premium (like vertical spreads) to offset the crush.
Q: Is it better to buy or sell options during earnings?
A: There is no "better." They just have different risks. Buyers (long call/put) have limited risk but need a massive move to overcome IV crush. Sellers (credit spreads) benefit from IV crush but need the stock to stay within a certain range.
Q: What is the safest option strategy for earnings?
A: No strategy is ever 100% safe. Everything involves risk. But, defined-risk strategies like bull call spreads or bear put spreads are considered more responsible because you know your maximum possible loss the moment you enter the trade.
Q: How do I know how much a stock will move on earnings?
A: We’d all love to know this. You can’t know for sure, but you can look at the expected move priced into the options market. Looking at the stock’s historical average earnings move over the last four quarters can also help you to see if the current market expectation is higher or lower than usual. Past performance doesn’t guarantee future results, but it does give context!
