How to Trade Earnings Reports with Options

Earnings season is one of the most exciting times for options traders. Stock prices can surge or collapse in minutes as companies reveal their quarterly results, creating both risk and opportunity. In this guide, we'll walk through how to trade earnings reports with options, how to find the “expected move,” what volatility crush means, and which option strategies can help you position for profits.

Why Earnings Reports Matter for Options Traders

Every quarter, publicly traded companies announce their earnings results and host conference calls with investors. These events can serve as catalysts that cause massive stock price movements, sometimes by 10%, 20%, or more in a single session.

Because no one knows precisely what management will reveal, option prices inflate before the announcement. This makes the period leading up to earnings a playground for traders who understand volatility, risk, and timing.

Understanding the Expected Move

Before an earnings report, traders can gauge how much a stock is expected to move by analyzing the at-the-money (ATM) straddle in the nearest expiration cycle that includes the earnings date.

For example, if a stock trades at $40 and the combined cost of the $40 call and $40 put (the straddle) is $6, the market is implying a $6 expected move in either direction about 15%.

If the stock moves more than $6 after the earnings announcement, options buyers win. If it moves less, option sellers usually collect profits.

Real Example: Enphase Energy (ENPH)

Let's look at an example with the stock Enphase Energy (ENPH). Suppose ENPH trades around $40 ahead of earnings, and the near-term options (expiring in three days) show implied volatility near 200%. That's exceptionally high, indicating that the market expects a significant move.

If the $40 straddle costs $5.90, the market expects ENPH to move roughly $6 up or down after the report is released. Traders can check later whether the actual move exceeded or stayed within that range to assess the accuracy of the implied move.

What Is a Volatility Crush?

After earnings are announced, uncertainty disappears, and so does the inflated volatility priced into options. This sudden drop in implied volatility is known as the volatility crush.

Even if the stock barely moves, option prices collapse the next day because the “event risk” is gone. For example, a straddle that cost $6 before earnings might be worth only $2 afterward, even if the stock moved just slightly.

That's why it's dangerous to buy expensive short-term options before earnings without a clear plan.

Why Trading Earnings Is Like Gambling

Let's be honest, trading earnings is a binary event. The stock will either surprise to the upside or downside, and your trade will likely produce a significant gain or a big loss overnight.

That's why it's smart to keep your position sizes small and use risk capital, only money you can afford to lose. Many traders view earnings plays as entertainment, not a core part of their portfolio strategy.

How to Research Earnings Moves

Before trading a company's earnings, review its historical reactions. A powerful tool for this is OptionSlam.com, which tracks how stocks have historically moved relative to their implied expectations.

For example, Roku (ROKU) has a history of significant earnings reactions. If its options imply a 15% expected move but the stock often swings 20% or more, that can make it a candidate for long-volatility strategies, such as buying straddles or strangles.

Strategy #1: Buying Straddles

A straddle involves buying both a call and a put at the same strike price and expiration. Traders employ this strategy when they anticipate a significant move but are uncertain about its direction.

Personally, I prefer to buy straddles not in the same week as earnings, but in the following week, with about 7–10 days to expiration. This extra time value cushions the position if the stock opens near the strike price.

If the stock doubles its expected move, your straddle can easily double in value overnight.

Strategy #2: Selling Iron Condors or Iron Butterflies

If you believe a stock will stay within its expected move, you can sell option spreads instead of buying them.

An Iron Condor involves selling a call spread and a put spread at different strikes. An Iron Butterfly is a tighter version, where the short strikes are the same.

These strategies profit when the stock's move after earnings is smaller than implied, and they limit your risk on both sides. For example, selling an Iron Butterfly for a $1.40 credit on a $2-wide spread caps your loss while giving you roughly 60% potential return if the stock stays inside the range.

Strategy #3: Locking in Profits with Stock Hedging

If your straddle or strangle makes a hefty profit overnight, you don't always need to wait for the market to open to close it. You can lock in gains after-hours by trading shares against your option position.

For instance, if you bought a call and a put and the stock gaps up sharply, you can short shares to lock in profits even before the next day's open.

That's the power (and risk) of trading earnings with options.

The Bottom Line

Trading earnings reports with options can be thrilling and profitable, but it's not a consistent income strategy. Treat it as a calculated gamble with limited risk.

Focus on learning how implied volatility works, how to read the expected move, and how to choose the right strategy for your market outlook. With experience, you'll recognize when the odds are in your favor and when to watch from the sidelines.