Featured Report: Earnings Season Options Trade: A Step-by-Step Guide

For years, people would ask me, “How do I trade earnings announcements?” My answer was always the same: “Don’t.” Back then, options expired once a month on the third Friday, making precision practically impossible.

Now, though?

The introduction of weekly options has revolutionized the options trading landscape. With shorter expiration cycles, traders now have:

1. Increased Flexibility: Weekly options provide more frequent opportunities to capitalize on market events, earnings reports, and volatility spikes.

2. Enhanced Strategy Customization: They allow traders to implement shorter-term strategies like credit spreads, iron condors, or straddles with more precision.

3. Rapid Theta Decay: Since weekly options have a shorter time to expiration, the time decay (theta) is significantly faster, making them ideal for income-generating strategies.

4. Lower Capital Requirements: With smaller durations, risk can often be better managed, and traders can allocate less capital compared to longer-dated options.

5. Earnings Season Game-Changer: Weekly options align perfectly with earnings announcements, enabling traders to speculate or hedge with minimal exposure to time decay post-event.

6. Increased Liquidity: Popular underlyings with weekly expirations tend to have tighter bid-ask spreads due to the higher trading volume.

Every quarter, traders—pros and retail alike—get excited, hedging and speculating around earnings, driving up demand for options. And with that demand comes a surge in implied volatility (IV). Right before a company releases earnings, IV can spike, making options more expensive. It’s predictable, even if the exact level isn’t.

This is where a disciplined, statistical approach makes all the difference. It filters out low-odds plays, focusing only on trades that stack the odds in your favor.

The Power of Probability

Trading around earnings is about managing a series of short-term, binary bets: Either the post-announcement price stays in a certain range, or it doesn’t. Typically, each trade I make has at least an 80% chance of success. And with enough trades, the “Law of Large Numbers” works its magic—over time, results should cluster around 80%.

But even high win rates won’t guarantee profits without solid risk management. I’ve known traders who win often but lose big. For me, success means keeping each trade small—no more than 1-5% of my portfolio—so that any single trade has limited downside. Some traders with smaller accounts may choose to use a higher percentage. My hope is that they never exceed 10% per trade.

Step 1: Check Liquidity

Before placing a trade, I look at liquidity. Of the 3,200 stocks with options, only about 11% have moderate liquidity, and a mere 3% are highly liquid. Those highly liquid stocks are where I focus my attention.

Step 2: Check IV Rank and Percentile

During earnings season, I also look at a stock’s IV rank and IV percentile:

• IV Rank shows if the stock’s IV is high or low relative to its range over the past 12 months.

• IV Percentile indicates how high the current IV is compared to its past levels over the last year.

I want the IV rank to be at least 35% and the IV percentile above 50%, if not higher, signaling a potential setup.

Step 3: Expected Move

Next, I estimate the “expected move,” which helps me anticipate the stock’s range post-earnings. If earnings are announced Tuesday after the close, I check the expected move for that Friday’s expiration. If earnings are due later in the week, I’ll look one week out.

Step 4: Historical Volatility

I study how the stock has behaved over the past 12 earnings cycles to gauge if it typically overshoots or stays within its expected range. I also consider the Earnings Volatility Ranking (EVR), where a higher EVR points to bigger moves and thus more aggressive options strategies.

Step 5: Choosing the Strategy

With the data in hand, I usually choose a defined-risk strategy—like an iron condor. An iron condor has limited risk, aiming to capture premium if the stock stays within a predicted or expected range. Occasionally, I’ll use an undefined-risk strategy, but I always stick to high-probability setups.

Here’s how it works in action. Take Nike (NKE): Let’s say it’s set to announce earnings next week. I’ll aim for an iron condor with a probability of success above 80% on both sides of the range, ideally yielding 10-35%.

The Setup

Let’s say Nike is trading at $126.33, with an expected range between $116 and $137. I’d place my short strikes outside of that range. On the call side, I might sell the $140 strike and buy the $145 strike, keeping the probability above 85%. For the put side, I’d sell the $111 strike and buy the $106 strike. This setup gives me a defined range with an 85% chance of success on each side. My margin of error for this trade? The upside has an 11% cushion, and the downside has a 12% cushion.

I’m looking at about a 23.5% return on this trade, assuming Nike’s price stays within my chosen range after earnings. The iron condor’s limited risk and high probability of success fit well with my disciplined approach.

Earnings trades can be volatile, and premium decay can work against you if you wait too long. I make these trades the day before earnings to avoid surprises. By prepping early, I’m ready to capitalize on volatility spikes when the time is right.

But—big returns aren’t my main goal as I understand that consistency in a high-probability approach will allow the law of large numbers to play out. Controlling risk is my top concern. My top priority, when controlling risk is defining my position size.

Quick Reminder: Position sizing is a cornerstone of trading success because it directly impacts both risk management and emotional discipline. Proper position sizing ensures that no single trade has the potential to cause significant damage to your portfolio, preserving capital and allowing you to stay in the game for the long term. Again, allowing the law of large numbers to work its magic. By limiting the percentage of your account at risk per trade, you protect against the inevitable losses that occur in trading, preventing a series of bad trades from wiping out your account. This disciplined approach helps traders maintain consistency, which is essential for building sustainable profitability.

Equally important, effective position sizing reduces emotional stress and impulsive decision-making. When the size of a position aligns with your risk tolerance and trading plan, you’re less likely to panic during market volatility or deviate from your strategy. It allows you to think rationally and stick to your trading rules without the fear of catastrophic losses clouding your judgment. In essence, position sizing acts as a safety net, enabling traders to focus on executing their strategy with confidence, regardless of individual trade outcomes

Ultimately, earnings trading is a calculated play, not a gamble. It’s about knowing the odds and stacking them in your favor.

A Step-By-Step Guide to Setting Up an Earnings Trade

Example: Let’s say Visa (V) is reporting earnings after the market closes, presenting a potential opportunity to examine a trade around this event. In this discussion, we will explore a trade using the iron condor strategy, which employs defined risk parameters to target gains within a specified price range, particularly useful around earnings announcements when implied volatility often rises. This walkthrough should aid those who are new to options, particularly earnings trades, in understanding the underlying mechanics and setup of this type of trade.

Structuring the Iron Condor Strategy

With Visa currently trading at $217.79, our initial task is to evaluate its anticipated price movement, or “expected move,” for the upcoming seven days—a range that extends from $207.50 to $227.50, providing us a rough $20 window. This estimate serves as a guide for setting up the iron condor by placing our short strikes just outside this expected range, which statistically increases the probability of retaining the premium.

The Call Side

Let’s establish the upper boundary of our range by selling the $232.50 call, which has an 88.34% probability of remaining out of the money, and protecting it by purchasing the $237.50 call, thus defining our risk to the difference in strikes, in this case 5, minus the premium received for selling the spread. The 232.5/237.5 spread has less than a 6% probability of reaching maximum loss, a manageable risk given the stock’s current position and expected move.

The Put Side

On the lower end, we aim to sell a put strike outside the expected move at $195, which carries a 91.24% probability of success, and then buy the $190 put to limit downside exposure and define our risk. This pairing reflects the desired structure for an iron condor, enabling the trade to succeed if Visa remains between $195 and $232.50 immediately after earnings are announced.

Expected Outcomes and Trade Details

This iron condor trade could yield a $0.67 credit (or $67 per spread) and requires a margin of approximately $433, providing a potential return of 15.5% if Visa’s price stays within the designated range. Our break-even points sit just beyond the short strikes, at $233.17 on the call side and $194.33 on the put side. Some may question the risk/reward on the trade, jut remember that our odds of success are 88% on the upside and 91% on the downside.

Practical Guidelines and Considerations

The goal of this iron condor trade is to capture premium if Visa’s post-earnings price falls between the $232.50 call and $195 put strikes. The probabilities of success are high—88.34% on the call side and 91.24% on the put side.

Summary of Key Metrics

• Probability of Success: 88.34% (call side), 91.24% (put side)

• Maximum Return: $67 per iron condor

• Breakeven: $233.17 (upside), $194.33 (downside)

• Maximum Loss: $433 per iron condor

This approach provides an educational framework for analyzing and setting up an iron condor around an earnings event. By following these structured guidelines, traders can gain insight into building high-probability trades in volatile market periods. Please feel free to reach out with any questions.