🎓 Topic of the Week: How to Trade Earnings with Expected Move, IV, and Proper Position Sizing

Every quarter, Wall Street enters a ritual: earnings season. And every earnings report brings a familiar surge in options activity—sky-high premiums, market-makers adjusting risk, traders hunting for edge. But if you’re simply guessing direction or gambling on a beat/miss, you’re not trading earnings. You’re just rolling dice.

Here’s the truth: You don’t need to predict the outcome of earnings to profit from them. What you need is a framework—one built on expected move and implied volatility (IV).

In this week’s Educational Corner, we’ll break down:

• ✅ What expected move really tells you (and how it’s calculated).

• ✅ How implied volatility shapes earnings trades.

• ✅ Which strategies best exploit inflated IV and mispriced expectations.

• ✅ How to avoid the #1 mistake most traders make during earnings season.

Let’s take a measured approach and let the probabilities do the heavy lifting.

🔍 What Is the Expected Move—and Why It Matters

Every time a company reports earnings, the market bakes in an “expected move”—a range that reflects what options traders believe the stock could move, up or down, by the end of the week (or expiration cycle) surrounding earnings.

This is not a prediction of direction. It’s a probabilistic range based on the price of at-the-money options and their implied volatility. In most brokerage platforms (like Thinkorswim or Tastyworks), the expected move is displayed right on the options chain or simply embedded in the options chain. But even if it’s not, you can calculate it easily:

Where T = days until expiration.

📌 Example: Let’s say Apple ($AAPL) is trading at $200, and the at-the-money options (same strike call and put) expiring Friday cost $6.00 total. With 5 days to expiration, the expected move would be:

$6 × √(5/365) ≈ $1.25
Add/subtract that to the current price:
Expected range: $198.75 to $201.25

This is the market’s best guess—driven by option demand—not just for direction, but for magnitude. That’s your first edge.

Thankfully, the calculations are built into most trading platforms. I’ll show you how it works with a real trade example shortly.

🌪️ Understanding Implied Volatility (IV) During Earnings

IV surges before earnings. Why? Because traders know big moves happen. And the demand for protection (or speculation) inflates option prices.

But here’s the kicker: Implied volatility almost always drops sharply right after earnings, regardless of what the stock does. This phenomenon is known as IV Crush.

If you buy options before earnings and the stock doesn’t move enough, you lose—even if you’re right about direction. The decay from IV crush often outweighs the gain from price movement.

That’s why selling option premium—not buying it—is often the smarter trade during earnings season. You’re selling overpriced insurance to those betting on drama.

⚙️ Strategies That Work: Trading Around the Expected Move

Now let’s talk tactics. Once you know the expected move and observe elevated IV, here are some examples of your best tools/strategies:

1. 🔧 Iron Condor (Outside the Expected Move)

This is a neutral, rangebound trade. You sell an out-of-the-money call spread and an out-of-the-money put spread, both outside the expected move range.

Ideal Setup:

• IV rank above 50%.

• Stock in a defined consolidation range.

• Earnings catalyst priced in, but market is overestimating volatility.

Example: $AMZN expected move ± $5.
Sell 195/200 call spread + sell 185/180 put spread.
Collect premium as long as $AMZN stays between 185 and 195 post-earnings.

Risk: Limited to width of spreads minus premium collected.
Reward: Premium collected.
Edge: You profit from both time decay and IV crush.

2. 🎯 Short Strangle (Inside or Near the Expected Move)

Higher risk, higher reward. You sell an out-of-the-money call and put—typically just outside the expected move.

Best Used When:

• You believe the stock will underwhelm expectations.

• You're comfortable with undefined risk (or hedge it with long wings).

Example: $META trades at $540, and has a ±$15 expected move.
Sell $570 call / $520 put.
Premium = $12.
Breakeven range = $508 to $582.
You keep the entire $12 if META stays between those bounds.

Risk: Unlimited if the stock blasts through your strikes.
Reward: High, if the move underperforms expectations.
Alternative: Turn it into an Iron Fly or Jade Lizard to reduce tail risk.

3. 📉 Put Credit Spread (Bullish Bias with Volatility Edge)

If you think earnings will go fine—or just not be disastrous—but don’t want to chase upside, use a bull put spread just below the expected move.

Example: $MSFT trades at $400, expected move ±$12.
Sell $380 put, buy $375 put.
Stock drops slightly or stays flat → you profit.

Advantage: Defined risk, positive theta, and you benefit from IV crush.
Pro Tip: Choose spreads with 0.20–0.30 Deltas on the short leg for optimal risk/reward.

🚫 Avoid This Classic Mistake: Guessing Direction with Long Options

One of the most expensive habits options traders develop is buying calls or puts before earnings with no plan beyond, “I think it’ll beat.”

Even when you’re right, the IV crush can erase gains—or worse, turn wins into losses. And when you’re wrong, you lose everything.

Instead: Trade the range. Sell into inflated expectations. Let time, volatility and IV Crush work for you.

📊 Checklist for Earnings Trades Using Expected Move & IV

Before placing any trade around earnings, run through this quick checklist:

✅ Is IV rank/percentile above 50%?
✅ What’s the expected move, and how does it compare to historical earnings reactions?
✅ Are you trading before or after the report (IV Crush hits immediately after the report is released)? I always trade prior to the release.
✅ Do you have a directional bias—or are you fading the move?
✅ Is your strategy defined-risk or undefined-risk? Do you have a hedge?
✅ Is your trade positioned outside the expected move for high-probability setups?

Remember: Good trades are not built on predictions—they’re built on probabilities.

📈 Earnings Strategy in Action: A Real Example

Visa ($V) is due to report earnings next week. It’s trading at $333, and the expected move is ±$15.61.

You analyze historical earnings and find the worst reaction to be -4.49% and the best reaction to be 8.09%. The expected range is $317.50 to $349.

IV Rank is just under to 50% and will most likely move above 50% as we move closer to earnings. That’s a red flag: the market is overpricing risk.

You decide to place a short iron condor strategy around the expected move to take advantage of the inflated implied volatility:

• Sell the 355/360 call spread

• Sell the 310/305 put spread

You collect $1.00 in premium with a maximum risk of $4.00. That gives you a breakeven range between $304 and $356. Based on current pricing, the probability of success is roughly 89% on the downside and 87% on the upside. The potential return is 25%, but I typically close the trade shortly after the earnings announcement to take advantage of the IV crush—that’s where the real edge comes from.

This trade profits if V stays within a 45-point range, well outside the expected move, and benefits from both time decay and IV crush.

Want higher return? Consider a short strangle. But remember—it’s undefined risk, so position sizing is even more critical.

What You’ve Done:

• Sold inflated options.

• Positioned outside the expected move.

• Structured a high-probability, risk-defined trade.

• Set yourself up to benefit from time decay and volatility collapse.

That’s how you trade earnings—not guess them.

⚖️ Position Sizing: The Most Overlooked Edge

This is one of the most aggressive types of trades I make due to its binary, short-term nature.

🎯 How I Think About Position Sizing During Earnings Trades

• ✅ Defined risk (like iron condors): 1%–2% of total capital per trade.

• ⚠️ Undefined risk (like strangles): 0.5%–1% max unless hedged.

• 🔁 Your job is not to win every trade. It’s to survive every trade.

🧪 Examples:

On $100,000 Portfolio:

• V Iron Condor ($400 risk): 2 contracts max

• V Strangle: 1 contract, ideally hedged

• V Bull Put Spread ($800 risk): 1–2 contracts max

Mindset Shift: Think in risk units, not contracts. Don’t ask, “How many can I sell?” Ask, “How much can I risk?”

🔁 Trade Selection Mindset: Quality > Quantity

You don’t need to trade every name on the earnings calendar. You just need to trade the ones with:

• ✅ High IV rank or percentile

• ✅ Well-defined expected moves

• ✅ Tight bid/ask spreads

• ✅ Liquid option chains

🧠 Final Thoughts: Trade the Reaction, Not the Report

Earnings season is where traders go to test their emotional discipline. But smart traders don’t care about headlines. They care about how the market prices in those headlines—and whether the pricing is wrong.

The combination of expected move, implied volatility and IV crush gives you a playbook. A way to turn earnings chaos into structured setups with edge.

It’s not about being right on the news. It’s about being right on the pricing.

📬 If you enjoyed this breakdown, don’t miss next week’s Educational Corner in The Option Premium—your go-to source for clear, actionable options education.

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