Core Idea
Short premium around the expected range
Before quarterly earnings, the expiration containing the announcement usually carries a large event premium. Once the report is public, much of that uncertainty disappears and implied volatility often drops abruptly. Traders refer to this as the IV crush.
This earnings trade therefore uses a short-premium structure. A short strangle and an iron condor generally benefit from falling implied volatility, but the realized stock move must not travel far beyond the expected range already priced by the options market.
Define the expected range and expiration
First, select a liquid stock with upcoming earnings. The scanner in the OWS can help identify candidates. The usual choice is the first expiration after the earnings release, because it contains the event premium most directly.
A practical approximation is: ATM call mid + ATM put mid = expected move. Subtract and add that amount to spot to calculate the lower and upper boundaries of the expected range.
Read the expected range as late as practical, preferably within the final two days before the earnings release and, if possible, even closer to the event. Option prices and event IV can still change before the announcement. See the expected move calculator.
- Spot price 100 USD.
- Expected move Call mid 4.20 USD + put mid 3.80 USD = approximately 8.00 USD.
- Lower boundary 100 - 8 = 92 USD.
- Upper boundary 100 + 8 = 108 USD.
- Expected range 92 to 108 USD.
Place the short put at the lower boundary and the short call at the upper boundary. The distance from the short put strike to the short call strike therefore represents the expected range. Round to available strikes with sufficient liquidity when the exact levels are not listed.
Version 1: Short strangle
The short strangle sells a 92 put and a 108 call in the same expiration. If the stock remains between the strikes while post-earnings IV contracts, both options should ideally lose value quickly.
- Leg 1 Short 92 put.
- Leg 2 Short 108 call.
- Maximum profit The net credit received.
- Lower break-even Short put strike minus net credit.
- Upper break-even Short call strike plus net credit.
A short strangle has no defined maximum risk: downside risk is substantial and upside risk is theoretically unlimited. Margin, position size, and assignment exposure must therefore be understood before entry.
Version 2: Defined-risk iron condor
The iron condor adds two farther out-of-the-money long options to the short strangle. The short strikes stay at 92 and 108 USD and still mark the expected range. Long wings at 88 and 112 USD cap the maximum risk.
- Leg 1 Long 88 put.
- Leg 2 Short 92 put.
- Leg 3 Short 108 call.
- Leg 4 Long 112 call.
- Maximum profit Net credit if the stock remains between 92 and 108 USD.
- Maximum loss 4 USD wing width minus net credit, multiplied by 100.
Iron condor: expected range is not break-even
- Long Put 88 / Short Put 92
- Short Call 108 / Long Call 112
The iron condor collects less premium than the short strangle, but both maximum risk and margin are defined. Both structures are negative vega and can benefit from the IV crush. A move outside the expected range can still overwhelm that volatility edge.
Earnings positions are therefore often closed shortly after the announcement once the IV crush has occurred. Holding to expiration can add gamma and assignment risk after the original event thesis has already played out.