Earnings Trade

Core Idea

What the trade tries to capture

Before earnings, options often price a larger event move. After the release, that event IV can collapse quickly.

That is why an earnings trade looks not only at direction, but also at the move already priced by the options market.

Calendar

Classic earnings structure

A classic earnings calendar sells the short rich earnings option and buys a longer-dated option at the same strike.

In the concrete example below I still use an iron fly, because that matches the structure described for this page.

Example

Iron fly around the expected move

A suitable stock with near-term earnings can be found through the OWS.

A practical shortcut is: ATM call mid + ATM put mid = expected move.

• Spot 100 USD
• Call Mid 4.20 + Put Mid 3.80 = expected move 8.00 USD
• Short 100 call + short 100 put
• Long 92 put + long 108 call

The stock should remain inside the wings. That is why the wings are often placed around the expected move.

Summary

The key points

• IV Crush Event IV often contracts sharply after earnings.
• Calendar Classic structure with a rich short earnings option.
• Iron Fly Concrete example around the expected move.
• Expected Move ATM call mid plus ATM put mid.
• Risk A move outside the wings.