Earnings season is one of the most exciting times for options traders, as stocks often make big moves following quarterly reports. However, trading options through earnings carries significant risks that can lead to unexpected losses—even if you predict the direction correctly.

Many traders jump into options plays before earnings, expecting large payouts, but fail to account for factors like implied volatility crush, unpredictable price action, and market expectations already being priced in.

📌 In this post, we’ll cover:
✔ Why earnings trading is so risky
✔ The biggest pitfalls traders face
✔ How to minimize risk and structure better trades

1. Why Is Trading Options Through Earnings Risky?

Earnings reports introduce a unique set of risks that don’t apply to normal trading days. These include:

🔹 A. Implied Volatility Crush (IV Crush)

• Before earnings, options premiums increase due to uncertainty. This is called high implied volatility (IV).
• After earnings, no matter what happens, IV drops sharply. This can destroy the value of both calls and puts—even if the stock moves in your favor!

💡 Example:

• A stock is trading at $100 before earnings.
• You buy a $105 call for $6.00 (expecting a post-earnings rally).
• The stock moves up to $107, but IV collapses after earnings.
• Your call option only increases to $6.50, instead of the expected $9 or $10.
• You barely make money—or even lose!

📌 Key Lesson: A correct directional bet isn’t enough; you must factor in IV crush.

🔹 B. Market Expectations vs. Actual Results

• Even if a company beats earnings estimates, the stock can still drop if guidance is weak or expectations were too high.
• Conversely, stocks can rise on bad earnings if expectations were overly negative.
• This means price moves are often unpredictable, regardless of what the earnings report says.

💡 Example:

• Netflix (NFLX) beats earnings estimates, but the stock drops 8% because subscriber growth was weaker than expected.
• Meanwhile, a stock like AMD misses earnings but jumps 10% because future guidance is strong.
• Traders who simply bet on an earnings “beat” or “miss” often lose money due to unexpected reactions.

📌 Key Lesson: Earnings beats/misses don’t always correlate with stock direction!

🔹 C. Wide Bid-Ask Spreads and Price Gaps

• Earnings cause massive volatility, leading to wide bid-ask spreads on options.
• If you try to exit a trade, you may face huge slippage—buying at a high price and selling at a much lower price.
• Stocks can gap up or down overnight, leaving no chance to react before the market opens.

💡 Example:

• You buy a $50 straddle (call + put) before earnings.
• The stock gaps up to $55, but your put becomes worthless instantly.
• Even though the call gains value, bid-ask spreads make it hard to exit profitably.

📌 Key Lesson: Options liquidity can be unreliable around earnings, making it harder to get fair pricing.

2. Biggest Pitfalls When Trading Earnings With Options

❌ 1. Buying Straddles or Strangles Without Checking IV

• Many traders think buying both a call and a put (straddle/strangle) before earnings is a safe bet.
• However, if the stock doesn’t move enough, IV crush wipes out both positions.
• Straddles only work if the stock moves more than the implied move.

🔹 Better Alternative: If playing earnings, consider selling volatility (iron condors, credit spreads) instead of buying it.

❌ 2. Holding Naked Options Instead of Spreads

• Traders who buy outright calls or puts are highly exposed to IV crush and theta decay.
• Spreads (vertical spreads, butterflies, iron condors) reduce risk while keeping profit potential.

🔹 Better Alternative: Use debit spreads instead of naked calls/puts to minimize IV risk.

❌ 3. Ignoring The Implied Move

• Every options chain prices in a projected move based on IV.
• If the implied move is +/-7%, and the stock only moves 3%, most options buyers lose money.

🔹 Better Alternative: Compare historical earnings moves to the current implied move before trading.

3. Safer Ways to Trade Earnings with Options

✅ 1. Sell Premium Instead of Buying It

• Selling options (credit spreads, iron condors) benefits from IV crush instead of suffering from it.
• If a stock moves less than expected, sellers keep the premium.

📌 Best For: When implied volatility is extremely high relative to past earnings moves.

✅ 2. Use Debit Spreads Instead of Naked Options

• Debit spreads help reduce exposure to IV crush and premium decay.
• Bull call spreads (for bullish setups) or bear put spreads (for bearish setups) reduce cost and risk.

📌 Best For: Traders who want directional exposure without overpaying for IV.

✅ 3. Trade Earnings Reactions Instead of Holding Through the Event

• Instead of betting before earnings, wait until the stock reacts.
• After the IV crush, options become cheaper, and trend-following trades have better risk/reward.

📌 Best For: Traders who want more controlled risk and don’t want to get caught in unpredictable price gaps.

Final Thoughts: Should You Trade Options Through Earnings?

✔ Earnings can create massive price swings, but also major risks.
✔ IV crush is the #1 killer of option profits—understanding it is critical.
✔ Directional bets often fail due to unpredictable stock reactions.
✔ Spreads and selling strategies are often better than naked long options.

🚀 Key Takeaway: If you trade options through earnings, use strategies that account for IV crush and implied moves. Otherwise, consider trading the post-earnings reaction instead.

🔹 Do you trade options through earnings? What’s your favorite strategy? Let me know in the comments!

Disclaimer: This article is for educational purposes only and does not constitute financial advice. Always conduct your own research before making trading decisions.