Strategies

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Strategies

Earnings Trade

Event IV often rises into earnings and then contracts sharply after the report.

Core Idea

Short premium and IV crush

Before earnings, option prices contain a large event premium. Implied volatility often contracts sharply after the announcement.

A short strangle or iron condor targets this IV crush while requiring the realized move to remain near the expected range.

Expected Range

Place the short strikes

A candidate stock can be found through the OWS. The first expiration after earnings is normally used.

ATM call mid + ATM put mid = expected move.

Read the expected range within the final two days before earnings and, if possible, even closer to the event. See the expected move calculator.

  • Spot 100 USD.
  • Expected move 4.20 + 3.80 = 8.00 USD.
  • Expected range 92 to 108 USD.
  • Short put Lower boundary at 92 USD.
  • Short call Upper boundary at 108 USD.

The distance from the short put strike to the short call strike therefore represents the expected range.

Version 1

Short strangle

  • Leg 1 Short 92 put.
  • Leg 2 Short 108 call.
  • Maximum profit Net credit received.

The short strangle collects more premium but has no defined maximum risk. Margin, position size, and assignment exposure are therefore critical.

Version 2

Defined-risk iron condor

  • Leg 1 Long 88 put.
  • Leg 2 Short 92 put.
  • Leg 3 Short 108 call.
  • Leg 4 Long 112 call.

Iron condor: expected range is not break-even

Iron condor: expected range is not break-evenThe line shows the result along the labelled price axis. Assumptions and legs are listed below.P/L per share (USD)-4028492100108116Underlying at expiry (USD)
Expected range: 92–108 USDExample credit: 1.50 USDBE: 90.5 / 109.5 USD
  • Long Put 88 / Short Put 92
  • Short Call 108 / Long Call 112
Result at the common expiry, including assumed net premium, excluding fees. P/L per share or option point; multiply by 100 for a standard contract with multiplier 100. White dots = break-even; dashed lines = strikes.

The long wings sit outside the expected range and define both risk and margin. The position is often closed shortly after the IV crush.

Summary

The key points

  • Expected range Spot minus/plus the expected move.
  • Timing Read it within the final two days before earnings.
  • Short strikes At the two expected-range boundaries.
  • Short strangle Higher premium but undefined risk.
  • Iron condor Long wings cap the risk.
  • Risk A large earnings move can overwhelm the IV-crush benefit.